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There are 2 types of prepayment penalties, they are;

1) Soft Prepayment Penalty
2) Hard Prepayment Penalty

Soft Prepayment Penalty

A soft prepayment penalty allows a borrower to sell their home at anytime without penalty, but if they choose to refinance the mortgage, they must pay the prepayment penalty.

Hard Prepayment Penalty

With a hard prepayment penalty the borrower with have a penalty if they sell their home or refinance their mortgage.

Below Are Some Key Points To Prepayment Penalties:

• Prepayment penalties will have a time limit to them of usually 2 -3 years.
• On a soft prepayment penalty the borrower does not incur a prepayment penalty if they sell their home to a non-related buyer.
• Prepayment penalties are in writing. Please check your mortgage paperwork for details.
• Always ask your loan officer/loan representative if there is a prepayment penalty on your loan. Many borrowers sign paperwork and they do not realize they signed for a prepayment penalty.
• The key benefit to the borrower for accepting a prepayment penalty is a lower interest rate.
• The key benefit to the lender for having a prepayment penalty is to lock a borrower into a loan for a few years. This way the lender does not have to worry about the borrower refinancing the loan right away.

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