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Reviewed by Casa Academy and updated July 29, 2026 using the current DBPR checklist and Pearson VUE scheduling guidance.

Prepayment Penalty Clause

A prepayment penalty clause is a loan provision that requires the borrower to pay an extra fee or yield maintenance charge if the mortgage is paid off or refinanced before a stated date, compensating the lender for lost interest income when early payoff disrupts the expected cash flow.

Exam context

Prepayment penalty charges early loan payoff. Disclosed on note and TILA forms. Soft prepay allows sale without penalty. Hard prepay applies on any early payoff including refinance.

How penalties are calculated

Fixed penalties may charge a percentage of the remaining balance or a sliding scale that declines each year. Yield maintenance compares the lender's lost interest to Treasury yields. Step-down schedules reduce the penalty from 3% in year one to zero after year five. Commercial loans and some portfolio products use prepay clauses more often than standard agency residential mortgages.

Borrower and agent implications

Sellers with assumable or low-rate loans should verify whether payoff triggers a penalty before closing. Refinance decisions compare penalty cost against interest savings. Licensees should not quote penalty amounts without reading the note and disclosure; state law may cap or ban residential prepayment penalties.

Examples

  • Step-down residential note

    A borrower refinances in year two and owes a 2% prepayment penalty on the outstanding $240,000 balance, or $4,800, because the note includes a declining penalty schedule.

  • Commercial yield maintenance

    An investor sells an office building and the lender invoices yield maintenance of $18,000 because paying off the CMBS loan five years early forfeits expected coupon income.

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