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Do home loans ever have a limit on what can be paid toward the principal during each month (or billing cycle)?

In other words: Do some lenders prohibit taking out a home loan and paying it completely off in as quickly as 1 month?

  • 1
    Please add a country tag as practise and regulations vary from county to county – Dheer Oct 1 '15 at 6:32
  • paying it completely off Even if they allow it, it willn't be without a substantial fee amount. Do some lenders prohibit taking out a home loan and paying it completely off in as quickly as 1 month? Why would you not wait, if you know money is around the corner ? Wait for a month and then buy the house. Why go through the unnecessary hassle of applying for a mortgage ? – DumbCoder Oct 1 '15 at 7:37
  • In the United States, a so-called "Conforming" mortgage that conforms to the Fannie Mae/Freddy Mac boilerplate will not have a prepayment penalty or limit. Any other loan (FHA, jumbo) may or may not as a business and marketing decision of the lender. law.missouri.edu/lawreview/files/2012/11/Forrester.pdf – user662852 Oct 1 '15 at 16:01
  • @DumbCoder Those are reasonable questions, but discussing them seems out of the scope of my question. – Geremia Oct 2 '15 at 1:16
  • Note that this is something you should check when comparing loan offers! – keshlam Oct 2 '15 at 2:08
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Yes.

In the UK, these are called Early Repayment Charges.

For example, the Halifax website states:

We offer different types of mortgage products with different interest rates. With some of these there may be a charge if you repay all or part of your loan within a certain period of time, we call these early repayment charges.

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Some home loans have a pre-payment penalty clause. In the United States, one of the summary pages that the borrower signs has a very prominent checkbox for whether the loan includes a pre-payment penalty clause.

Most U.S. home loans being issued at this time do not have pre-payment penalties.

On the other hand, many U.S. construction loans and construction-to-permanant loans do have a pre-payment penalty. One regional bank charges 1 percent of the maximum line of credit if more than 25% of the principal is paid off in any of the first four years of the construction-to-permanent loan. (This pre-payment penalty is not applicable if the borrower pays off the loan as part of selling the home.) This provision allows the bank to book 1 percent of the loan amount as revenue in the first year of the deal, and depreciate this amount over four years. The bank can do this because the buyer has accepted a slightly higher interest rate, and promised to pay the full 1 percent even if the buyer refinances to avoid the higher interest rate.

Some U.S. banks charge a higher loan origination fee if the property was listed for sale during the 12 months before the borrower applied for the loan, or if the loan has "high risk for payoff" characteristics. One regional bank charges an extra 1 percent of the loan amount in these circumstances.

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