What is a Flat Prepayment Penalty?

What is a Flat Prepayment Penalty?

A Flat Prepayment Penalty in real estate lending is a fee charged to a borrower if they pay off their loan early, regardless of the timing or amount of the prepayment. Unlike other types of prepayment penalties that may decrease over time or be based on a percentage of the remaining loan balance, a flat prepayment penalty remains the same throughout the life of the loan.

For example, if a borrower has a loan with a flat prepayment penalty of $10,000 and decides to pay off the loan early—whether it's one year or five years into the loan term—they will be required to pay that fixed penalty amount.

Lenders impose prepayment penalties to compensate for the loss of interest income that would have been earned if the loan were kept for the full term. These penalties protect the lender's financial return and deter borrowers from refinancing or selling properties too quickly to take advantage of lower interest rates.