The full explanation
According to the CFPB, it usually applies if you pay off the whole balance within a certain number of years, for example when you sell or refinance, and sometimes if you pay a large amount at once; it does not normally apply to small extra principal payments. Many states limit these penalties. The Loan Estimate says whether the loan has one, and the details may be in the note or an addendum.
An example
Felipe expects to sell his home in a few years. Before signing, he looks for the “Prepayment Penalty” line on the Loan Estimate and asks for a similar offer without a penalty to compare.
You will see it in…
- The Loan Estimate, page 1 (“Prepayment Penalty”)
- The Closing Disclosure, under “Loan Terms”
- The note or its addendum (“Addendum to the Note”)
