What Is a Prepayment Penalty?

By
Services for Real Estate Pros with W. Darrell Walters

A prepayment penalty is a fee charged to borrowers that make full payment on their mortgage, or pay off a substantial portion (generally anything exceeding 20% of the total loan amount), ahead of schedule. This is a clause written into some contracts to protect the lender’s book of business in exchange for providing a lower interest rate, or for providing financing to a high-risk borrower.

Prepayment penalties vary with different lenders, but generally apply to a one-, two-, three-, or five-year period ofPrepayment Penaltytime. This fee can be expressed as either a specific number of months’ interest or a percentage of the outstanding balance. A ‘hard’ prepayment penalty applies to either the refinance or the sale of a property. A contract written with a ‘soft’ prepayment penalty permits the borrower to sell their property without incurring a penalty, but does restrict refinancing for a set period of time. It is important for the consumer to know that a prepayment penalty is the borrower’s choice and should never be considered a requirement!

Make sure you are working with a reputable loan professional who is aware of your long-term plans before consenting to sign off on an agreement that includes a prepayment penalty! Always ask for a written evaluation of your loan options.

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Tags:
mortgage terms
prepayment penalty

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Rainmaker
177,495
Debbie Holmes
Gold Key Real Estate - Boise, ID
Gets the job done!

I haven't seen a prepayment clause in a few years.  I hope most of them have expired....

Oct 28, 2011 09:51 AM #1
Rainmaker
1,744,758
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

When they were out and about, I hated them. There was always a battle over including/excluding them

Oct 28, 2011 09:54 AM #2
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Rainmaker
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Darrell Walters

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