A prepayment penalty is a fee your lender may charge if you pay off your mortgage before the end of its term, switch lenders early, or make extra payments beyond what your mortgage agreement allows. That can include paying off the mortgage when you sell your home.
The key word here is term. If you have a five-year mortgage term with a 25-year amortization, paying it out during those five years could trigger a penalty—even though you’ve always made your payments on time.
How much could it cost?
Potentially thousands of dollars. Common calculation methods include three months’ interest or the interest rate differential (IRD), which uses a comparison of interest rates over the time remaining in your term. The calculation depends on your mortgage contract and lender, so don’t assume it will be a small, fixed fee.
Does every extra payment trigger a penalty?
No. Many closed mortgages include prepayment privileges, allowing specified extra payments without a penalty. Open mortgages allow early repayment without a prepayment penalty, although other fees may still apply.
Before selling, refinancing, or switching lenders, ask your lender for a written payout estimate for your intended date. Knowing the cost upfront helps you calculate your sale proceeds—or decide whether a lower mortgage rate would actually save you money.
Because the balance on your mortgage statement may not be the whole cost of saying goodbye.
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