Lenders / Pre-Payment / Purchase / Rates & Terms / Refinance / Rental Properties / Variable Interest Rates

Payout Penalties

A payout penalty is charged when you pay off the mortgage principle prior to the renewal date or pay the mortgage principal down beyond the allowable prepayment privilege amount. The most common payout penalty calculations are the GREATER of 3 months interest or interest rate differential (IRD)

3 months interest– Amount currently owing on your mortgage x current interest rate charged divided by 365 x 90 days

Example – $300,000 x 5% divided by 365 x 90 days = $3,698.63

Interest rate differential– The IRD amount is calculated on the amount being repaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate the lender can now charge when re-lending the funds for the remaining term of the mortgage.

Step 1: ________ (A) the current interest rate under your Mortgage expressed as a decimal (for example, 6.75% = .0675)
Step 2: ________ (B) the current interest rate that your existing lender can now charge for a mortgage term offered with the term closest to your remaining term. Make sure it is expressed as a decimal.
Step 3: ________ (C) A – B = C, which is the difference between your current interest rate and the interest rate in B above (write C as a decimal)
Step 4: ________ (D) amount you want to prepay
Step 5: ________ (E) number of months for the remaining term of your Mortgage
Step 6: ________ (F) (C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential Amount

A= 5% or 0.05       B= 3% or 0.03 for a 3-year term as that is what is left on your existing term       C= A- B= 0.02         D= $300,000     E = 3 yrs X 12 = 36 months

F = 0.02  X   $300,000  X   36 months  =  $216,000  divided by 12 = $18,000 interest rate differential payout penalty

In this case, you would be charged the Interest Rate Differential as it is the GREATER of the two.

**These calculations are very basic as some lenders use different calculations for payout penalties. Your lender is the only one who can give you an exact figure.

**NOTE** Some of the non-bank lenders have different pay out penalties and it is up to you as the borrower to be aware of exactly what they are prior to committing to the mortgage terms.

Advertisements

22 thoughts on “Payout Penalties

  1. Pingback: 10 Things You Need to Know About Second Mortgages |

  2. Pingback: Picking The Perfect Mortgage |

  3. Pingback: How To Be Mortgage Free Faster |

  4. Pingback: A Smooth Move |

  5. Pingback: Mortgage Fact or Fiction |

  6. Pingback: Heading for Splitsville? |

  7. Pingback: The Mortgage Process in 10 Steps |

  8. Pingback: Should I Refinance Right Now? |

  9. Pingback: How To Pick A Mortgage Type |

  10. Pingback: So Your Mortgage Got Declined |

  11. Pingback: How much do you know about second mortgages? |

  12. Pingback: Switching Mortgage Lenders |

  13. Pingback: Mortgage Mistakes |

  14. Pingback: 10 Tips for First Time Home-Buyers |

  15. Pingback: How To Have A Stress Free Mortgage Closing |

  16. Pingback: So your mortgage got declined

  17. Pingback: It’s Not All About Rate |

  18. Pingback: How To Get A Mortgage |

  19. Pingback: 8 Mortgage Secrets Everyone Should Know |

  20. Pingback: What should you do when your mortgage renews? |

  21. Pingback: 5 Specialty Mortgage Products You Don’t Know About |

  22. Pingback: I Now Pronounce You Happily Mortgaged |

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s