Prior to the mortgage meltdown, prepayment penalties were relatively common. The penalties were typically from one to five years in length, and were commonly associated with Adjustable Rate Mortgages (ARMs). Almost all sub-prime loans had them, as did “negative amortization” loans (where the payments did not even cover accrued interest).
The prepayment penalty amounts usually worked out to be about 5 months of interest.
What Happened to Traditional Prepayment Penalties?
There are currently no loan products that we know of with prepayment penalties.
Understanding Early Payoff Fees for Lenders
Lenders/Investors do, however, charge an “Early Payoff Fee” if a loan pays off within six months. This fee is not charged to borrowers though; it is paid by the originator. This will be explained further on Wednesday.
