Real estate has its own language, and unless you’ve bought a home before — perhaps even if you have — there are probably certain terms that feel like one big question mark.
And one of those terms is prepayment penalties.
Prepayment penalties are a type of fee associated with certain mortgages, and before you apply for a loan and buy a home, it’s important to understand it.
A recent article from realtor.com outlined common questions about prepayment penalties, including:
- What is a prepayment penalty? A prepayment penalty is a fee that some lenders charge when you pay off the entirety, or a large portion of your mortgage, before the final due date. This fee is to discourage borrowers from paying their homes off early, since the earlier you pay off your mortgage, the less interest you pay to the bank.
- Do all loans have prepayment penalties? No! While some loans have prepayment penalties, there are plenty that don’t, including conventional loans and government-backed loans like FHA or VA loans.
- How much are prepayment penalties? Prepayment penalties vary by lender and loan program, but in many cases, they fall around six months of interest or six months of the monthly payment.
