Do You Have IRD?

Have you checked your financial wellness yet?

Do you know whether the sale of your home will leave you in the financial infirmary? The costs of selling your home are well documented. The one that seems the most elusive though is the mortgage penalty.

It seems with the lowering of interest rates people are finding that breaking a mortgage is more than what they bargained for. Most mortgages are subject to either a 3 month payment penalty or Interest Rate Differential (IRD), depending on which is higher. With the drop in interest rates IRD is usually the prognosis.

So what is IRD? Here is a basic understanding for you. You bought your home 3 years ago. Your mortgage rate at the time was 5.99% on a 5 year fixed term. The balance left on your mortgage is $200,000. The rate your lender is charging today is 3.99%. You will take the value you have left, multiply it by the months remaining and the difference between the interest rates to get your penalty. In this instance you are looking at about an $8,000 penalty. Now this is a guideline as each lender calculates this amount in their own special way. I found a great "rough idea" calculator online for you to estimate your costs.

As with any contract, when signing your mortgage you need to read the fine print. If you are working directly with a lender (ie The Bank) make sure you ask exactly how their penalty works should you choose to break the mortgage. If you are working with a mortgage broker have them explain the different penalties on the different mortgage options you are looking at.

It is not uncommon with the rate declines we have seen over the last 6 months to see $10,000-$25,000 in mortgage penalty. I would suggest before you decide to sell your house that you find out what your IRD is so you don't find yourself looking for a miracle cure. Here is a discussion on a blog between a lender(PC Financial) and a home seller that clearly shows the lenders do not feel bad about sticking to their contracts and getting what they can. If you have made it through a bought of IRD feel free to leave a comment and advise others of the lender that infected you with this money draining condition. You may be responsible for saving someones financial life.

So what do you do if you have been diagnosed with a high cost IRD? If you are dead set on selling make sure you minimize your other costs to help maintain your financial health and then contact a mortgage professional to ensure you are protected the next time. Based on this TV ad, I am not sure this "doctor" would be my first choice to help.


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