How to Calculate IRD
IRD, or interest rate differential, is an important concept in calculating the balance owing on a mortgage. The IRD takes into account the difference between today's interest rates and the interest rate on the mortgage. When paying out a mortgage early, the bank will calculate the IRD to come up with a payout figure that is often far different from the mortgage balance showing on the annual or monthly mortgage statement.
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Instructions
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Review your most recent mortgage statement. Note the monthly payment, the interest rate and the time left on the mortgage. For example, if you are in a five-year mortgage that you have been making payments on for two years, you will still have three years or 36 monthly payments left on the mortgage.
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Find the current interest rates on a similar mortgage by using one of a number of different methods. Most banks have current mortgage rates posted on their website. You can also call your bank to get their most recent mortgage rate. If your bank does not publish or release current mortgage rates, you can search for rates on other bank or mortgage company websites. They will be very close to what your bank or mortgage company charges, as mortgage rates are very competitive.
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Find a free "Present Value of an Annuity" calculator online or manually calculate the result. Because of the advanced nature of the calculation, plugging the relevant numbers into an online calculator is the easiest method to get your result. Many investment information websites offer annuity calculators.
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Calculate the balance owing today on your mortgage using the amount and number of payments owing in the term at the current interest rates. For example, if you owe 36 more payments of $500 and the current interest rate is 4 percent, the balance owing today on your mortgage is $16,945.59. This is the same as saying that if you borrowed $16,945.59 today at 4 percent and had to pay it off over 36 months, your monthly payment would be $500.
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Compare the calculated balance owing with the balance showing on your most recent statement, and this represents the penalty you will be paying to pay your mortgage out early. The higher the differential, the less financially worthwhile it is for you to pay your mortgage out early.
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Tips & Warnings
When you look for a mortgage for your home, look for mortgages that do not incur a penalty for early payment.
