Pre-Payment Penalty
A fee charged for paying off all or part of a loan before a defined period elapses.
Pre-payment penalties were once common in residential lending but are now largely banned on most loan types subject to federal Qualified Mortgage rules. Some non-QM loans, business-purpose investor loans, and select commercial mortgages still include them.
When they apply, pre-payment penalties typically run for the first three to five years of the loan and are calculated either as a percentage of the prepaid amount or a sliding fee that declines over time. The exact structure must be disclosed in the loan documents.
If you're working with a loan that has a pre-payment penalty, factor it into any refinance or sale planning. Holding the loan a few extra months until the penalty expires can save real money, and the math is usually straightforward once you have the schedule.
Related terms
Other terms you'll see alongside Pre-Payment Penalty
A mortgage that doesn't meet the Qualified Mortgage standards set by federal regulation, often used for self-employed borrowers or non-standard income.
Replacing an existing mortgage with a new one, typically to lower the rate, change the term, or extract equity.
The standardized three-page disclosure a lender must provide within three business days of a complete loan application.
A property purchased not to live in but to rent out or hold for appreciation, with stricter financing terms.
Want to apply Pre-Payment Penalty to your real numbers?
Get a personalized estimate in under a minute, or talk to a licensed HCMG loan officer about how this affects your specific situation.