What is prepayment penalty?
Prepayment penalties are interest funds paid to the lender if a loan is retired before the term agreed upon in the loan documents. Prepayment penalty terms vary and may be defined in your Note. Generally, prepayment penalty clauses apply during the first 3 to 5 years only and there is no prepayment penalty thereafter.
Prepayment penalties are those charges which a lender imposes if you wish to pay off your loan early. Typically home mortgages are written for 15 or 30 year periods of time. While you may not hold the mortgage for the full term, it is likely that you will probably stay in the property longer than just one or two years. Loans with a prepayment penalty usually have a lower interest rate. But, in exchange for this lower rate, you’ll have to pay a penalty if you pay off the loan early (within the first three years of buying your home). This penalty can be up to 3% of the loan amount. For this reason, you should carefully read your note and mortgage documents, in particular the prepayment penalty clause to understand conditions which would apply to your loan. The loans which will carry a prepayment penalty often penalize you only for paying off the loan early in the first five years, and thereafter a graduating scale may apply, or there may be no prepayment penalty at all after that initial
