Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A prepayment penalty can offset some or all of the interest saved by paying a loan off early, so the decision to prepay isn't just about the interest avoided. It's about the interest saved net of whatever penalty the note actually charges for paying it down ahead of schedule.
Before you rely on it
What to check
Read the note's actual prepayment penalty terms rather than assuming a standard percentage, since the specific formula and any exemptions vary by lender and loan type.
The common error
Where people go wrong with loan prepayment penalty calculator
Calculating interest savings from an early payoff without netting out the prepayment penalty. On some loans the penalty consumes most or all of the apparent savings, turning an early payoff into a wash or even a net cost.
Sensitivity evidence
How penalty percentage changes the estimated prepayment charge
| Penalty percentage | Estimated prepayment charge | Net interest savings after charge | Total payoff including charge |
|---|---|---|---|
| 0.000% | $0.00 | $35,000 | $200,000 |
| 1.0% | $2,000 | $33,000 | $202,000 |
| 2.0%worked example | $4,000 | $31,000 | $204,000 |
| 3.0% | $6,000 | $29,000 | $206,000 |
| 4.0% | $8,000 | $27,000 | $208,000 |
Every input, tested
Which input moves the estimated prepayment charge most
| Input | Tested from | To | Estimated prepayment charge at each end | Swing |
|---|---|---|---|---|
| Penalty percentage | 1.0% | 3.0% | $2,000 to $6,000 | $4,000 (100%) |
| Balance being prepaid | $180,000 | $220,000 | $3,600 to $4,400 | $800 (20%) |
| Fixed prepayment charge | $0.00 | $1.00 | $4,000 to $4,001 | $1.00 |
| Interest otherwise remaining | $31,500 | $38,500 | $4,000 to $4,000 | none |
Two variables at once
Estimated prepayment charge by penalty percentage and balance being prepaid
| Penalty percentage \ Balance being prepaid | $160,000 | $200,000 | $240,000 |
|---|---|---|---|
| 0.000% | $0.00 | $0.00 | $0.00 |
| 1.0% | $1,600 | $2,000 | $2,400 |
| 2.0% | $3,200 | $4,000 | $4,800 |
| 3.0% | $4,800 | $6,000 | $7,200 |
| 4.0% | $6,400 | $8,000 | $9,600 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Balance being prepaid | $200,000 |
| Penalty percentage | 2.0% |
| Fixed prepayment charge | $0.00 |
| Interest otherwise remaining | $35,000 |
| Estimated prepayment charge | $4,000 |
| Net interest savings after charge | $31,000 |
| Total payoff including charge | $204,000 |
Where the inputs come from
The balance being prepaid is the amount you would pay off, taken from your statement. The penalty percentage comes from the note or the prepayment clause; some loans use a fixed dollar charge instead, which you enter separately. Interest otherwise remaining is the interest you would pay if you kept the loan to term. Your lender can provide a payoff quote that shows any charge.
When the result stops applying
Penalty formulas differ: some use a percentage of the balance, some a number of months of interest and some a declining schedule. The result is an estimate based on the entered rate, and the contract governs. Mortgage prepayment penalties are restricted by federal rules and many states, and most consumer auto and personal loans no longer carry them.
What to compare it with
Before paying a penalty, ask the lender for a written payoff statement that shows the exact charge, and check whether the penalty falls or ends on a known date. If the savings are small, waiting can be smarter than paying. If you are refinancing, add the penalty to the refinance costs and compare with the monthly savings. Some lenders will waive the charge if you refinance with them, so ask before assuming the number is fixed.
People also ask
Frequently asked questions
How do I know if my loan has a prepayment penalty?
Check the promissory note and the disclosures you received at closing. Search for "prepayment" and ask the lender for a written payoff quote.
Do mortgages have prepayment penalties?
Some do, but rules limit their size and duration, and many mortgages have none. Confirm in your loan documents.
Should I refinance and pay a penalty?
Compare the penalty plus closing costs with the interest savings over the time you will hold the new loan.