Interest Rate Differential

The prepayment penalty most fixed-rate mortgages charge if you break the term early. Variable-rate mortgages and the floor on most fixed-rate mortgages use a simpler 3-month interest penalty instead. IRD applies when it produces a higher number than 3-month interest, which on most files means you pay the harsher of the two.

The catch: how IRD is calculated varies by lender, and the difference can be a factor of ten. Big banks typically use posted-rate IRD: the spread between the posted rate at signing and the current posted rate. Posted rates are discounted heavily, so the spread is enormous. Monoline lenders and some credit unions use discounted-rate IRD: the spread against your actual contract rate, which is much closer to the 3-month interest floor.

On a $400,000 fixed mortgage, the same break could cost $5,500 (3-month interest), $8,000 (discounted IRD), or $12,000+ (posted-rate IRD). Which math your file gets is determined at signing, not at break time. Trevor's deep walk-through is at Refinance Penalties: What 3-Month Interest vs IRD Actually Means. The Refinance Calculator models both scenarios.