Interest Rate Differential: What you need to know before Breaking your Mortgage

It's tempting to look at today's historically low mortgage rates and consider breaking out of your mortgage early to get a better rate. Certainly, if your existing rate is significantly higher than today's rates, this might make economic sense. But before you decide, consider what you might have to pay in IRD (Interest Rate Differential). An IRD is a prepayment penalty charged by a bank when you break out of your mortgage early. When a bank lends money, it borrows those funds from investors and guarantees to pay the investors a certain return over time. If you break out of your mortgage early, the interest the bank was earning is no longer coming in, so it doesn't have enough funds to continue paying investors the agreed-upon rate. To make up the difference, it charges an IRD. Current interest rates affect how much IRD you pay. If rates are rising—which means the bank can replace your mortgage with one at a higher rate—the IRD is generally lower. And if rates are dropping, the IRD is generally higher. Another consideration is that if you break out of your mortgage to go to a new lender, you usually also have to pay about $1,000 in legal fees. The way banks calculate IRDs is complicated and takes into account your existing rate, what current rates are, how big your balance is and how much time is left in your term. Some people feel that if your balance is at least $250,000 and the difference between your existing rate and the new rate is at least 0.5%, then it makes sense to break out of your mortgage, since the IRD will be lower than the interest you'll save in the future. However, the only way to know for sure if it makes sense to break your mortgage early is to have an analysis done of your specific situation. Please call me today if you'd like to take advantage of this free service. Mark Kupina - www.kupinamortgage.com