What is a prepayment penalty?

A prepayment penalty is a condition that some mortgage loans have that charges a borrower a fee if they pay off their loan before it is due. This is put in place to ensure that the lender does not lose money due to the borrower paying off the loan early. In Virginia, prepayment penalties are usually not allowed, except in certain instances such as those involving balloon payments, adjustable-rate mortgages, and loans with negative amortization. The penalty amount can vary, and is usually stated in the loan agreement. Generally, the penalty is a percentage of the principal balance at the time the loan is prepaid. The amount of the penalty and the circumstances under which it is imposed are regulated by state law. Some lenders may also require a borrower to pay a prepayment penalty if they sell their home before the loan term has ended. Prepayment penalties can be a significant cost, so borrowers should be aware of them and make sure they are not a part of any loan agreement they enter into.

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What is a prepayment penalty?

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