A fee charged by some lenders if you pay off your mortgage early — through a sale, refinance, or large extra payments.
Full Definition
Some loans include a prepayment penalty clause that charges a fee if the loan is paid off or significantly reduced within a specified period, typically 3–5 years. The fee may be a percentage of the remaining balance, a set number of months' interest, or a sliding scale that decreases over time. Prepayment penalties are prohibited on most QM (Qualified Mortgage) loans and all FHA, VA, and USDA loans. They appear primarily on non-QM loans, some ARM products, and older conventional loans. Before accepting any loan with a prepayment penalty, calculate whether the lower rate offered compensates for the potential exit cost if your plans change.
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