What Is Prepayment Penalty?
Prepayment Penalty: A fee for paying off a loan early, common on investment property loans.
A prepayment penalty is a fee a lender charges if you pay off all or a large part of the loan within a set period, usually by selling or refinancing.
Common structures
- Step-down: for example, 5-4-3-2-1 means 5% of the balance in year one, 4% in year two, and so on
- Flat: a fixed percentage for the penalty period
- Months of interest: for example, six months of interest
Where you'll see them
Prepayment penalties are rare on primary-home mortgages, and restricted by federal rules when they're allowed. They're common on DSCR and other investment loans, where a longer penalty usually earns a lower rate.
Good to know
Pick a penalty period that matches how long you plan to hold the property. If you might sell or refinance in two years, a five-year penalty can cost more than a slightly higher rate.