What Is a Prepayment Penalty?

Prepayment Penalty: What It Is and How It Works

By Kristi Waterworth – Updated Nov 20, 2025 at 9:21 PM EST | Fact-checked by Frank Bass

Key Points

Prepayment penalties increase costs for early loan payoff, often added to mortgages.
Soft prepayment options permit selling homes without penalty, unlike hard penalties.
Investors in MBS might receive prepayment penalties, affecting expected returns.

If you've bought a house or are thinking about it, you may have discovered that there's a little extra tucked into your mortgage note -- a prepayment penalty. Prepayment penalties can be very expensive clauses within your mortgage but, depending on your long-term plans, may not be the end of all things. Read on to learn what this is, how it works, and how to avoid it when possible.

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A mortgage payment marked in blue on a large calendar page. — Image source: Getty Images.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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