A prepayment penalty is a charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan early. Loans with a prepayment penalty usually have a lower interest rate.
You should make sure you know what your prepayment penalty is and how long it is for. Some lenders offer a soft prepayment penalty which means you can sell without a penalty and some are hard which means if you sell or refinance you will have to pay the penalty.
In some cases, it may be worth your while to pay the penalty and refinance into a more beneficial loan product. For instance, you may have an adjustable rate mortgage (ARM) that has adjusted to a much higher rate. You need to consult a mortgage loan consultant to determine the most appropriate action for your financial situation.
Most pre-payment penalties are calculated as six months of pre-paid interest on 80% of the balance of the loan. Interest paid on your home is tax deductible at the end of the year, so basically it's a wash. A pre-payment penalty shouldn't stop you from getting a new loan if the benefits outweigh the costs.
