There are many ways a lender can penalize a borrower if he or she wants to exit a loan or mortgage or change any of the terms before the mutually agreed upon time of the loan. The legalities and ethics are not the issue here. The issue is the mathematics.

A fair minded lender would use the Interest Rate Differential (IRD) method to calculate the “penalty” if a borrower wanted to terminate a loan prematurely or more commonly lower the interest rate. In fact, it is incorrect to call the IRD a “penalty”, thus the quotation marks. A mortgage is a contract regarding the future! Time and money are exactly related and the IRD fairly compensates the lender. In simple english, its really “pay me now or pay me later”. Any accountant is capable of performing a cash flow analysis and a future-value/present-value calculation concerning your mortgage and potential “penalties” regarding lower interest rates. The MORTGAGE2 PRO amortization software does the IRD calculation automatically if one renews at a lower rate before the term expires.