What is a Soft Prepayment Penalty?

What is a Soft Prepayment Penalty?

A Soft Prepayment Penalty in real estate lending is a fee charged to a borrower for paying off their loan early, but it only applies if the prepayment is due to refinancing, not if the property is sold. This type of penalty is more flexible compared to a hard prepayment penalty, which applies regardless of the reason for the early payoff.

For instance, if a borrower refinances the loan to take advantage of lower interest rates, they would have to pay the soft prepayment penalty. However, if they sell the property and use the proceeds to pay off the loan, the penalty would not apply.

Lenders use this type of prepayment structure to still protect their expected interest revenue while giving the borrower more flexibility in the event of a sale.