Quick answer
A prepayment penalty is a fee some lenders charge if you pay off all or part of your mortgage early — typically when you sell the home or refinance within the first few years. Small extra principal payments normally don’t trigger it.
Key facts
Federal limits
Under the ability-to-repay rule, a prepayment penalty is generally allowed only on a fixed- or step-rate Qualified Mortgage that isn’t higher-priced, and it is capped at 2% of the balance prepaid in the first two years and 1% in the third. No penalty can apply after 3 years. A lender that offers a loan with a penalty must also offer you one without.
If you refinance a $280,000 balance in year two, the most a penalty could be is $5,600; in year three, $2,800. Include that in any break-even math.
How to spot one
Page 1 of the Loan Estimate has a Prepayment Penalty line in the Loan Terms table that says yes or no, and if yes, the maximum and when it ends. The same line appears on the Closing Disclosure. If you expect to sell or refinance soon, or plan a recast, ask for a loan without one. The refinance break-even calculator shows whether a refinance still pays.
Sources
- 12 CFR 1026.43(g) — Maximum prepayment penalty in the first two years (share of balance prepaid); Maximum prepayment penalty in the third year (share of balance prepaid); Prepayment penalty may not apply after this many years (qualified mortgages) (Oct 28, 2026)
- CFPB: What is a prepayment penalty?
Last reviewed Figures are checked against the sources above. Read our editorial policy. This page is general information, not financial advice — see the disclaimer.