Pre-Payment Penalty

Interested in paying your loan off early? You may come across a fee known as a pre-payment penalty. Read on to learn about what these penalties are and how they work. 

A pre-payment penalty that some lenders charge when borrowers pay off their loan early. These penalties are designed to recoup some of the money that would have been paid in interest throughout the remaining duration of the loan. 

Some hard money lenders issue pre-payment penalties to borrowers who finish paying their loan early. Because hard money loans tend to be higher risk, they also tend to have higher interest rates and higher pre-payment penalties. In many cases, hard money lenders will require you pay the remaining interest the loan may have accrued as a pre-payment penalty.

Source Capital never charges pre-payment penalties. Borrowers are free to pay off their loans at any point within their loan terms without facing consequences. 

A homeowner takes out a hard money bridge loan to finance the purchase of a new home when they haven’t yet sold their old home. The bridge loan is for $300,000, has an interest rate of 10%, and a 12-month term. Their loan is structured with interest-only payments and a balloon payment at the end. Their hard money lender charges a pre-payment penalty that’s equal to the interest that would have been accrued throughout the remainder of the loan. 

After just 6 months, the homeowner sells their home and wants to pay off their loan. At this point, they’ve paid half the interest on their loan for a total of $15,000 ($2,500 each month for 6 months). Their lender requires them to pay the remaining interest on their loan, another $15,000. Their total payment is $330,000 ($300,000 loan principal plus $15,000 in interest and a $15,000 prepayment penalty).

A homeowner takes out a hard money bridge loan to finance the purchase of a new home when they haven’t yet sold their old home. The bridge loan is for $300,000, has an interest rate of 10%, and a 12-month term. Their loan is structured with interest-only payments and a balloon payment at the end. Their hard money lender charges a pre-payment penalty that’s equal to the interest that would have been accrued throughout the remainder of the loan. 

After just 6 months, the homeowner sells their home and wants to pay off their loan. At this point, they’ve paid half the interest on their loan for a total of $15,000 ($2,500 each month for 6 months). Their lender requires them to pay the remaining interest on their loan, another $15,000. Their total payment is $330,000 ($300,000 loan principal plus $15,000 in interest and a $15,000 prepayment penalty).

The same homeowner takes out the same hard money bridge loan from a different hard money lender who doesn’t charge pre-payment penalties. After just 6 months, the homeowner sells their home and wants to pay the loan off. Because their lender doesn’t charge penalties, they can simply pay off the remainder of their loan without additional interest. Their total payment is $315,000 ($300,000 loan principal plus $15,000 in interest, no penalty).