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Mortgage  Question?
How Do I Determine if Mortgage Has Prepayment Penalty?

How Do I Determine if a Mortgage Has a Prepayment Penalty?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

A prepayment penalty is a fee charged by a lender if a borrower repays a mortage before a specified period of time.  Following the real estate market collapse in 2008 the government imposed new regulations to discourage prepayment penalties.  For example, Fannie Mae guidelines do not permit prepayment penalties for borrowers or lenders.  Fannie Mae, a government sponsored entity (GSE), is the largest buyer of mortgages from lenders in the U.S. so its policies help shape the mortgage marketplace and influence loan terms and features for borrowers.  Given these Fannie Mae guidelines, prepayment penalties for mortgages are relatively uncommon and you should avoid any mortgage that charges one.  Mortgage prepayment penalties, however, are not illegal.  Prepayment penalties are usually charged by non-traditional, hard money lenders or for specialized mortgage programs

To determine if a mortgage has a prepayment penalty you should review the Loan Estimate (LE) document that lenders are required to provide to you within three days of applying for a mortgage. The Loan Estimate indicates if a mortgage has a prepayment penalty in the "Loan Terms" section at the top of page one of the document. We provide an Overview of How to Use a Loan Estimate as well as a Detailed Breakdown of Loan Estimate Line Items, inlcuding the prepayment penalty, on FREEandCLEAR.

Additionally, the Mortgage Note you sign at the end of the mortgage process that outlines the key terms and features of your loan also indicates if your mortgage has a prepayment penalty (typically found in point four on page 1 under "Borrower's Right to Repay.") We provide an Example Mortgage Note on FREEandCLEAR

Diligent borrowers that take the time to review the right mortgage documents can determine if a mortgage has a prepayment penalty and avoid the penalty by changing lenders or mortgages 

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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