View All Learning Articles
Is May 2024 a Good Time to Buy a Home?
The 100% HELPER Act Mortgage
The $25,000 Downpayment Toward Equity Cash Grant
The Biden $15,000 First-Time Homebuyer Tax Credit
$10,000 First-Time Home Buyer Mortgage Relief Credit
14 Grants & Programs for First-Time Home Buyers
View All Research Articles
170+ Mortgage Statistics
Generational Home Buyer Statistics
Annual HMDA Home Buyer Study
Most Popular Places for Vacation Homes In Every State
Gen Z Home Buyer Distribution By Location
Younger Millennial Home Buyer Distribution By Location
Older Millennial Home Buyer Distribution By Location
ZIP Code Invasions: Gen Z
ZIP Code Invasions: Younger Millennials
ZIP Code Invasions: Older Millennials
Dan Green
Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. Read more about Dan Green.
How We Make Money
Homebuyer.com is your trusted guide to homeownership. Since 2003, our team has offered real-world expertise and advice to tens of millions of U.S. home buyers. Our content stands on its integrity: it's factual, unbiased, and free from outside influences. Read our editorial guidelines.
Homebuyer.com is a mortgage-company-affiliated publisher. We earn compensation when you click specific links on the website, or apply for a mortgage with Homebuyer.com or a partner listed in our comparison tables. Our partners compensate us differently, so we randomize our tables to protect our readers from steering. We may also earn compensation for advertisements on the site, which are indicated clearly. Note that limitations in our software, whether we originate mortgages in your area, and credit factors may affect the offers and comparison tables you see on various parts of this site. We do not include offers for every mortgage product available. Someday, we hope we will.
Trusted Content
This article was checked for accuracy as of January 18, 2024. Homebuyer.com ensures every piece of information we share reflects the latest in mortgage standards. Learn more about our commitments in our editorial guidelines.
A prepayment penalty is a clause in some mortgage contracts that states the home buyer must pay a fee for paying off the mortgage within a specified number of months.
A prepayment penalty is a mortgage contract clause stating that the home buyer will be assessed a fee for paying off the mortgage loan within a specified time frame. Lenders use prepayment penalties to discourage home buyers from refinancing their mortgages or selling their homes too quickly after settlement.
The prepayment penalty fee is typically a percentage of the home buyer’s remaining loan balance, up to 5 percent. However, first-time home buyers should not expect to see a prepayment penalty included in their mortgage.
Since 2009, prepayment penalties have been rare. Today, they only exist with portfolio mortgages and other mortgages issued by local banks and credit unions such as home equity loans. None of the popular mortgage loan types backed by the government – conventional, FHA, USDA, and VA – include the prepayment penalty clause.
According to the FFEIC and data from the Home Mortgage Disclosure Act (HMDA), no mortgages were made to home buyers between 2018-2022 linked to conventional mortgages, FHA mortgages, USDA mortgages, or VA mortgages that also had prepayment penalties.
All prepayment penalties were linked to home equity loans, portfolio loans, and other non-standard mortgage types.
Year | Mortgages Made | Mortgages with Prepayment Penalties |
Percentage with Prepayment Penalties |
2018 | 5,237,967 | 2,128 | 0.04% |
2019 | 5,373,362 | 2,981 | 0.06% |
2020 | 5,615,219 | 1,050 | 0.02% |
2021 | 6,143,684 | 12,138 | 0.20% |
2022 | 4,938,616 | 4,151 | 0.08% |
Imagine a first-time homebuyer purchasing a non-warrantable condo in a newly-built building. Because the condo is non-warrantable, it’s ineligible for traditional mortgage financing. So, the home buyer uses a local bank to finance the property and accepts its non-warrantable condo mortgage terms including higher fees and an above-market interest rate to compensate for risk, and a 2-year percent prepayment penalty equal to 1% of the balance.
After a year of living in the condo, the buyer’s condo building status changes to warrantable condo status, which means that the buyer can potentially refinance to a standard mortgage at today’s lower rates. However, because it’s still within 24 months of closing, refinancing would trigger the 1% prepayment penalty clause in the buyer’s original mortgage.
The buyer decides that the refinancing benefits outweigh the prepayment penalty cost, which is added to their loan balance as part of the transaction.
A mortgage prepayment penalty is typically triggered when a home buyer pays off a large portion or all of their mortgage loan before the agreed-upon time frame in their mortgage contract expires. Triggering a prepayment penalty usually occurs through refinancing, but can also happen from selling your home or making large lump-sum payments.
Yes, prepayment penalties are legal, but the allowable terms vary by state and lender. Some states have specific regulations regarding the maximum penalty allowed or the duration during which a penalty can be applied.
The best way to avoid a prepayment penalty is to choose a mortgage that doesn’t include one. The good news is that prepayment penalties are exceedingly rare. In 2022, exactly 0 home buyers using a conventional, FHA, USDA, or VA loan were given a prepayment penalty.
See more mortgage statistics here.
In some cases, home buyers can negotiate the terms of their prepayment penalty – but only before signing a mortgage agreement. Negotiations may involve reducing the penalty amount or shortening the penalty period.
The calculation method for a prepayment penalty varies. The most common type of calculation is as a percentage of the remaining loan balance, but flat fees or a certain number of months’ interest are common, too.
This article, "What is a Prepayment Penalty?" draws on the author's professional mortgage experiences and references information found at these authoritative websites:
Wave goodbye to waiting times and say hello to our Immediate Mortgage Approval. It's more than just a mortgage - it's your ticket to home-buying freedom, available anytime you are. With ultra-low rates at your fingertips, the power to secure your future is just a click away. Why wait for office hours? Your home doesn't.
What is a Starter Home?
A prepayment penalty is a clause in some mortgage contracts that states the home buyer must pay a fee for paying off the mortgage within a specified number of months.
About
Learn
Research