Prepayment Penalties On Investment Loans
A prepayment penalty is a fee for paying off certain loans early. They apply to investment and business-purpose loans, not to owner-occupied mortgages. Here is how they work.
How a prepayment penalty works
The choices on an investment loan
- It applies only to investment and business-purpose loans
- You choose a penalty period on at least one program
- A longer penalty term usually improves your pricing
- A no-penalty option is offered on at least one program
- The penalty applies only if you pay off early
- After the period ends, you can pay off freely
Not on owner-occupied loans
Common on investment loans
Choose your penalty term
A longer term improves pricing
It applies only if you pay off
Disclosed in your loan terms
What A Prepayment Penalty Is
A fee for paying off an investment loan early
A prepayment penalty is a fee a lender can charge if you pay off a loan early, during a set window after closing. It exists so a lender that offered better terms up front is protected if the loan is paid off almost immediately.
Prepayment penalties apply to investment and business-purpose loans, such as DSCR rental loans. They are not used on owner-occupied home loans, and agency and FHA programs do not allow them at all. This is a key difference between a personal mortgage and an investor loan.
On at least one investor program you choose the penalty term, and its length is disclosed before you close. A longer term generally improves your pricing, while a no-penalty option costs more. Once the term ends, you can sell, refinance, or pay down the loan without a penalty.
How penalties affect an investor loan
A prepayment penalty is a tradeoff you control on an investment loan. Here is how it works and when it applies.
Investment Loans Only
Prepayment penalties are a business-purpose feature. They appear on investment and DSCR loans, not on the loan for a home you live in. Agency and FHA loans do not permit them.
You Choose The Term
On at least one investor program you select the length of the penalty period. The choice is yours and it is set before you close, not added later.
A Longer Term Helps Pricing
Choosing a longer penalty period generally improves your pricing, because the lender has more assurance the loan will stay in place. A no-penalty option is available if you value flexibility more.
It Applies Only Early
The penalty can be charged only if you pay off or substantially pay down the loan during the penalty period. Regular monthly payments never trigger it.
Selling Or Refinancing Counts
Selling the property or refinancing during the penalty window can trigger the fee, so it is worth planning your hold period before you choose a term.
State Rules Can Apply
Some states limit or restrict prepayment penalties even on investment loans. The available terms depend on the property’s state and are disclosed in your loan documents.
Hear From Homeowners Like You
Frequently Asked Questions
Common questions about prepayment penalties.
It is a fee a lender can charge if you pay off a loan early, during a set window after closing. It applies to investment loans, not owner-occupied mortgages.
No. Owner-occupied home loans do not carry prepayment penalties, and agency and FHA programs do not allow them.
On at least one investor program you choose the term, and it is disclosed in your loan documents before you close. After it ends, you can pay off the loan freely. Your loan officer confirms the options for your scenario.
It generally improves your pricing, because the lender has more certainty the loan will stay in place. A no-penalty option is available at a higher cost.
Paying off or substantially paying down the loan during the penalty period, including through a sale or refinance. Regular monthly payments do not trigger it.
Often, yes. A no-penalty option is offered on at least one program, though it usually comes at a higher cost.
Yes. Some states limit or restrict them even on investment loans, so the available terms depend on where the property is located.
Find out what you qualify for
Planning an investment purchase or refinance? We can walk through the penalty options and pick the term that fits your plan.
Get Pre-QualifiedPrepayment penalty availability, terms, pricing, and program eligibility are subject to credit approval, property and program review, and state law. Prepayment penalties may apply to business-purpose and investment loans where permitted by state law, and are disclosed in your loan documents. This page is informational and is not a commitment to lend. Not all applicants will qualify.