Does My Loan Have a Prepayment Penalty?
The image below is an example of a Truth in Lending Disclosure Form. Lenders are required to provide this standard form to borrowers for every major loan. This document contains summary information about the terms of your loan, including information about any prepayment penalties.
The first line, which begins "Notice to Borrowers Required by Federal Law," will help you determine if you are looking at the right page.
The first row is another way to determine if you are looking at the right page. On this disclosure form, Annual Percentage Rate (APR) and Finance Charge information appears in the top left corner. (The numbers are included as an example; your numbers will vary.)
This line tells you whether your loan includes a prepayment penalty. If boxes are checked indicating you
1. "may" be charged a penalty, and
2. "will not" be entitled to a refund,
it is highly likely that your loan includes a prepayment penalty.
Ask your broker or loan officer whether you will pay extra fees if you pay off or refinance your loan before a certain date (usually between 2 and 5 years). If they tell you there is no prepayment penalty, have them confirm it in writing.
If they tell you there is or "may be" a prepayment penalty, ask what the maximum amount of the penalty would be -- in dollars -- along with how long the prepayment penalty period is. Have them confirm it in writing. If there is a prepayment penalty, that may be a signal to (1) shop elsewhere or (2) try to negotiate the penalty away.