With interest rates at historic lows, many homeowners have been thinking of refinancing their mortgages in order to take advantage of lower rates. However, if you are currently locked into a closed, fixed rate mortgage, you should be aware of a potentially large charge imposed by some lending institutions for prepaying a mortgage loan before the end of its term. This charge is often referred to as the Interest Rate Differential (“IRD”).

The IRD is calculated based on the amount of principal that you are prepaying, the remaining length of your mortgage term, and the difference between your original mortgage interest rate and the interest rate that your existing mortgage lender could charge today to borrowers. Basically, the IRD charge is an attempt to compensate your lender for the lost revenue that it would have generated had you remained with them for the balance of your mortgage term. The IRD becomes an important consideration when interest rates have decreased significantly from your original mortgage interest rate, and there is still a significant portion of your mortgage term remaining. In some cases, the IRD charge can make refinancing to capture a lower interest rate a less than profitable venture.

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