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Definition
A prepayment penalty is a fee some lenders charge when you pay off your mortgage balance early, whether through refinancing, selling, or making large extra payments. It exists to protect the lender's expected interest income. For Qualified Mortgages under CFPB rules, prepayment penalties are sharply restricted and barred on most consumer mortgages after the first few years. Not every loan carries one, and the terms vary by lender and loan type. The only reliable way to know is to read your loan documents: the penalty, its amount, and how long it applies should be spelled out in your promissory note and closing disclosure. If you plan to refinance or sell soon, check the note before you sign so an early payoff doesn't trigger an unexpected charge.
Also Known As
Prepay penalty
Early payoff fee
Prepayment fee
PPP
Used in Context
- Before refinancing two years into her loan, Maria reviewed her note and found a prepayment penalty that would apply if she paid off early.
- A Dreamy Leads mortgage form asks borrowers whether their current loan includes a prepayment penalty, since that affects refinance timing.
- The loan officer explained that because the mortgage was a Qualified Mortgage, no prepayment penalty could be charged after the first few years.
Are prepayment penalties legal on mortgages?
They can be, but they're limited. For Qualified Mortgages under CFPB rules, prepayment penalties are sharply restricted and barred on most consumer mortgages after the first few years. Whether your specific loan has one depends on its type and terms, so check your promissory note before assuming.
How do I find out if my loan has a prepayment penalty?
Read your loan documents. The promissory note and closing disclosure should state whether a prepayment penalty applies, how much it is, and how long it lasts. If you can't tell, ask your servicer directly before refinancing or selling so you avoid an unexpected fee.
Does paying extra each month trigger a prepayment penalty?
It depends on your loan's terms. Some penalties apply only to full payoffs from refinancing or selling, while others can apply to large extra payments. Since terms vary, review your note for exactly what triggers the fee before making big additional payments.
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