What Is a Prepayment Penalty?
A prepayment penalty is a fee a lender charges when a borrower pays off a loan early — in whole or in part — before the end of its term. Lenders include it to recover some of the interest they expected to earn over the life of the loan. The penalty discourages early payoff, including through refinancing or an early sale.
How Prepayment Penalties Work
- Often calculated as a percentage of the remaining balance or a set number of months' interest
- Frequently step down over time and expire after the first few years
- Must be disclosed in the loan documents and federal disclosures
Limits in Florida and Federal Law
Prepayment penalties are tightly restricted on most residential mortgages. Federal rules (under the Dodd-Frank Act and the "qualified mortgage" standards) sharply limit or prohibit them on typical owner-occupied home loans, and Florida law restricts prepayment penalties on many consumer loans. They are more common in commercial and investment-property financing, where they remain negotiable. Borrowers should always check the note for a prepayment clause before refinancing or selling.
Related Terms
- Mortgage — Where prepayment terms appear
- Refinance — A common trigger for the penalty
- Payoff Statement — Will reflect any prepayment charge
Barnes Walker Real Estate
Barnes Walker's attorneys review loan documents, prepayment terms, and refinance issues for Florida borrowers. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC