Prepayment Penalties

With so many mortgage programs available and consumers wanted the lowest rate possible, some lenders charge a prepayment penalty. This is a clause in your mortgage that states if your loan is paid off normally within one to three years, the lender charges a fee. Some states prohibit these fees so check your state.

Penalties
If your loan has a three-year prepay penalty, amount of the penalty is 3 percent of the loan balance if paid off in the first year, 2 percent the second year and 1 percent the third year.

Normally, fixed mortgages or balloons do not charge a prepay penalty. When shopping for your mortgage and a prepay penalty is included, make sure you understand the terms completely or ask the lender for other options.