What Is a Mortgage Prepayment Penalty?

Borrowers considering paying off their mortgage ahead of time might encounter a financial barrier known as a prepayment penalty.

A prepayment penalty is a fee that some lenders charge when borrowers pay off all or part of a loan earlier than scheduled. This fee allows lenders to recoup some of the interest revenue they would lose from an early payoff.

While these penalties are not a feature of every mortgage, they can significantly affect financial decisions for some borrowers.

The penalty is usually applied if the loan is paid off within the first few years, often the first five, as noted in specific loan agreements.

Lenders use this fee structure to encourage borrowers to stick to the agreed repayment schedule.

Borrowers should carefully review their loan terms and consult with their lenders to fully grasp whether such penalties apply to their mortgage and how they might impact their financial planning.