# Prepayment penalty

> A prepayment penalty is a fee for paying off a mortgage early, usually by selling or refinancing in the first years. Federal limits and where to check.

URL: https://mortgage-math-us.com/glossary/prepayment-penalty/  
Last reviewed: 2026-10-29 · By the MortgageMath US Editorial team

## Quick answer

**A prepayment penalty** is a fee some lenders charge if you pay off all or part of your mortgage early — typically when you sell the home or refinance within the first few years. Small extra principal payments normally don’t trigger it.

## Key facts

| Fact | Value | Source | As of |
|---|---|---|---|
| Maximum penalty in years 1–2 (share of balance prepaid) | 2% | [12 CFR 1026.43(g)](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43) | Oct 28, 2026 |
| Maximum penalty in year 3 | 1% | [12 CFR 1026.43(g)](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43) | Oct 28, 2026 |
| No penalty after | 3 years | [12 CFR 1026.43(g)](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43) | Oct 28, 2026 |

## Federal limits

Under the ability-to-repay rule, a prepayment penalty is generally allowed only on a fixed- or step-rate [Qualified Mortgage](https://mortgage-math-us.com/glossary/qualified-mortgage/) that isn’t higher-priced, and it is capped at 2% of the balance prepaid in the first two years and 1% in the third. No penalty can apply after 3 years. A lender that offers a loan with a penalty must also offer you one without.

If you refinance a $280,000 balance in year two, the most a penalty could be is $5,600; in year three, $2,800. Include that in any [break-even](https://mortgage-math-us.com/glossary/break-even-point/) math.

## How to spot one

Page 1 of the [Loan Estimate](https://mortgage-math-us.com/glossary/loan-estimate/) has a Prepayment Penalty line in the Loan Terms table that says yes or no, and if yes, the maximum and when it ends. The same line appears on the [Closing Disclosure](https://mortgage-math-us.com/glossary/closing-disclosure/). If you expect to sell or [refinance](https://mortgage-math-us.com/glossary/refinance/) soon, or plan a [recast](https://mortgage-math-us.com/glossary/recast/), ask for a loan without one. The [refinance break-even calculator](https://mortgage-math-us.com/tools/refinance-break-even-calculator/) shows whether a refinance still pays.

## Sources

- [12 CFR 1026.43(g)](https://www.ecfr.gov/current/title-12/chapter-X/part-1026/subpart-E/section-1026.43) — Maximum prepayment penalty in the first two years (share of balance prepaid); Maximum prepayment penalty in the third year (share of balance prepaid); Prepayment penalty may not apply after this many years (qualified mortgages) (Oct 28, 2026)
- [CFPB: What is a prepayment penalty?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-prepayment-penalty-en-1957/)

_General information, not financial advice._