Two years ago, Bob and Mary borrowed $152,135 amortized for 27 years, and signed a five year term at an interest rate of 11%. Now, three year term interest rates are 7%. Bob and Mary would like to pay 7% interest for the remaining 3 years of monthly payments, instead of 11%. The Lender asked them for a $15,440 interest rate differential (IRD) payment along with their 24th monthly payment if they wanted the interest rate lowered to 7% for the remaining 3 years. How can Bob and Mary make an informed decision about paying the $15,440?

This is the same example as the IRD example in the Mortgage Article section. The only difference is the way one thinks about discounting. Instead of thinking of the IRD amount of $15,440.04 as a “penalty” just think of it as the amount of money required to give to the lender so that the lender make a return of 7% instead of 11% over the next 36 months.