What Is a Prepayment Penalty?

Short answer

A prepayment penalty is a fee some lenders charge if you pay off all or a large part of your mortgage early, usually by selling or refinancing within the first few years (CFPB, checked October 2026). On home loans for personal use, federal rules allow it only on certain fixed-rate Qualified Mortgages, capped at 2% in years 1 and 2 and 1% in year 3. Business-purpose investor loans like DSCR often carry one.

Definition

A fee, agreed at closing, for paying off the loan early. It usually applies for a set period, often three or five years, and only to a full payoff or a large lump sum.

Worked example

Example only: an investor with a $500,000 DSCR loan and a 5-4-3-2-1 penalty sells in year 2 with about $492,000 still owed. The penalty is 4% = about $19,680. On a consumer QM loan with a $300,000 balance, the most a lender could charge is $6,000 (2%) in year 1 or 2, $3,000 (1%) in year 3 and $0 after that.

Rules for primary-home loans

Under the CFPB Ability-to-Repay and QM rule (as of October 2026), a prepayment penalty is allowed only on fixed-rate or step-rate QMs that are not higher-priced, where state law permits.

• Max 2% of the balance prepaid in years 1 and 2
• Max 1% in year 3
• None after year 3
• The lender must also offer you a loan without a penalty

DSCR and investor loans

DSCR loans are business-purpose loans, and Regulation Z exempts credit made primarily for a business purpose, so the QM limits above do not apply. Common structures, per one lender's published guidance as of October 2026:

• Step-down, such as 5-4-3-2-1 (5% in year 1, falling to 1% in year 5)
• A fixed percentage for the term
• Six months of interest on prepayments above 20% of the original balance in 12 months

Terms usually run 1 to 5 years where state law allows. A longer penalty may improve pricing; a shorter one costs more upfront. Rates vary daily; call for today's pricing.

In South Florida

Miami investors often buy, renovate, rent and then refinance or sell within a few years. If that is your plan, match the penalty term to your exit, or ask for a shorter or no-penalty option and compare total cost.