A prepayment penalty is a fee charged by the lender if the borrower pays off a mortgage before a certain amount of time, usually two to five years. Most prepayment penalties are stated as a percentage of the loan balance or a certain number of months interest.

Prepayment penalties are most common on sub-prime mortgages made to lenders with tainted credit histories. Some lenders also charge them on loans to prime borrowers, usually in exchange for a lower interest rate.

The penalty must be disclosed up-front in the truth-in-lending document, but many borrowers neglect to read this fine print before signing a loan.

If possible, it’s best to get a loan without a prepayment penalty. That way, if interest rates drop and you want to refinance your loan, you are free to change lenders without incurring the fee.