What are Interest Rate Differentials?

Owner of Greenwood Mortgage, Liz Clay provides clients with quality mortgage plans that fit their individual financial futures. Having been in the mortgage field for almost 10 years, Liz Clay is familiar with a wide range of mortgage information that she provides to her clients, including information about interest rate differentials.

Interest rate differentials, or IRDs, are compensation charges related to real estate mortgages that are used to determine pre-payment penalties. If the homeowner pays off the mortgage before its maturity date, or pays the principle down farther than their prepayment privileges, an IRD may be applied. The IRD is based on two things: the amount that is being pre-paid, and an interest rate that amounts to the difference between what a lender can charge today when re-lending funds, and what the original mortgage rate was. For many fixed-rate mortgages, the prepayment penalty is typically higher than the IRD, while many variable-rate mortgages do not have IRD charges at all.