A mortgage has an outstanding balance of $250,000 and a remaining amortization of 20 years. The current fixed rate is 4.50% compounded semi-annually. If the borrower wants to break the mortgage, the lender charges the greater of 3 months' interest or the Interest Rate Differential (IRD). The current posted rate for a similar mortgage term at the original time of funding was 3.00% compounded semi-annually. What is the approximate cost of the 3 months' interest penalty?

Question: A mortgage has an outstanding balance of $250,000 and a remaining amortization of 20 years. The current fixed rate is 4.50% compounded semi-annually. If the borrower wants to break the mortgage, the lender charges the greater of 3 months' interest or the Interest Rate Differential (IRD). The current posted rate for a similar mortgage term at the original time of funding was 3.00% compounded semi-annually. What is the approximate cost of the 3 months' interest penalty?

Answer options: ✅ $2,812.50

• $3,750.00
• $4,500.00
• $5,625.00

Correct answer: $2,812.50

Explanation: Three months' interest is calculated as (Outstanding Balance * Current Rate / 2) / 2 * 3. So, ($250,000 * 0.045 / 2) * 3 months (Note: Annual rate / 4 for 3 months) = ($250,000 * 0.045 / 4) * 3 (This calculation is wrong) Correct: 3 months interest = (Outstanding Balance * Annual Rate) / 4 = ($250,000 * 0.045) / 4 = $2,812.50. This is based on the annual interest, then divided by 4 for three months of that annual interest. The semi-annual compounding is factored into the annual rate here. Let's check: (250,000 * 0.045) / 2 (semi-annual interest) * (3/6) (3 months out of semi-annual period) = 250,000 * 0.0225 * 0.5 = 2812.5. So $250,000 * (0.045 / 12) * 3 = $2,812.50.