Quick Answer
A prepayment penalty charges you a fee for paying your mortgage off early, whether through a home sale or a refinance. Most conventional mortgages issued today don't include one, but it's still worth checking your loan estimate and closing documents to be sure.
- What it is
- A fee for paying off a loan early
- How common today
- Rare on standard conventional mortgages
- Where to check
- Your loan estimate and closing disclosure
- Triggered by
- Selling, refinancing, or large extra payments
Why Prepayment Penalties Exist
Lenders earn money over the life of a loan through interest, so paying it off early reduces that expected income. A prepayment penalty offsets some of that loss on the small share of loans that still include one.
Modern lending rules have made prepayment penalties far less common than they once were, and many loan programs prohibit them outright.
How to Check Your Loan
Your loan estimate and closing disclosure will both disclose whether your loan includes a prepayment penalty, so review those documents closely before signing. If you plan to sell or refinance within the first few years, this is worth confirming upfront.
If you're unsure whether your current mortgage has one, your loan servicer or the original closing paperwork can confirm it.
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Frequently Asked Questions — Prepayment penalty
Are prepayment penalties legal in Indiana?
Prepayment penalty rules depend on the loan type and federal regulations; many modern mortgage programs prohibit them, though it's still worth verifying your specific loan.
Do FHA or VA loans have prepayment penalties?
Government-backed loans like FHA and VA generally do not allow prepayment penalties.
How do I know if my loan has one?
Check your loan estimate and closing disclosure, or ask your lender or servicer directly.
Does selling my home early trigger a prepayment penalty?
It can, if your loan includes one and you sell within the penalty period. Most current loans do not have this feature.