Difference between banks and monoline lenders -- it’s in the calculation!
Most non-bank lenders calculate the difference between your original rate and the current rate for the remaining term – “discounted to discounted”.
Banks calculate differently. If the original rate was really 4.29% (their posted rate) but they did you a favour and only charged you 3.5%, the IRD would be calculated between 4.29% and the reinvestment rate, (how much less interest they will receive over the remaining term at the lower earning rate) which increases the IRD amount – “posted to discounted”.
Penalties can only be quoted “as of today”. The penalty changes with the following:
- Passing an anniversary date
- Mortgage balance
- Interest rate changes
- Remaining time to maturity
The penalty is not finalized until there is a formal payout statement requested by you, based on a firm payout date.
Bottom line for bank calculations: If interest rates fall, IRD penalties increase.