Prepayment Penalty

In depth

Prepayment penalties charge a fee, often a percentage of the prepaid balance or a stated dollar amount, when the borrower pays off the loan before maturity. Misconception: prepayment penalties are not allowed on most consumer mortgages under Dodd-Frank, especially HPMLs and qualified mortgages. Practically, in seller-financed commercial and investor deals, prepayment penalties are negotiable and common, ensuring the seller earns a minimum yield. Penalties typically step down over time (e.g., 5/4/3/2/1 percent over five years). Sellers benefit because the note holds value if the buyer refinances quickly. Buyers should negotiate prepayment terms to preserve refinancing flexibility. Always check applicable consumer protection rules.