Soft Prepayment Penalty

Soft Prepayment Penalty

• A. A policy that restricts the borrower from being able to refinance within a certain time frame, but will allow the borrower to sell
• B. A penalty for early payoff
• C. A policy that requires a second mortgage
• D. A fee for closing costs

Answer: (A)

A soft prepayment penalty is a restriction that prevents refinancing within a certain period, while still allowing the borrower to sell the property without penalty. This matches the option that says you can’t refinance for a set time, but you’re free to sell. The idea behind this approach is to discourage early refinancing and protect the lender’s anticipated yield, without penalizing the borrower if they choose to sell the home. By contrast, a general prepayment penalty would apply to any early payoff (a hard penalty), regardless of whether the borrower refinances or sells. The other options don’t describe this concept: requesting a second mortgage isn’t related to prepayment penalties, and a fee for closing costs is separate from prepayment protection.

A soft prepayment penalty is a restriction that prevents refinancing within a certain period, while still allowing the borrower to sell the property without penalty. This matches the option that says you can’t refinance for a set time, but you’re free to sell. The idea behind this approach is to discourage early refinancing and protect the lender’s anticipated yield, without penalizing the borrower if they choose to sell the home. By contrast, a general prepayment penalty would apply to any early payoff (a hard penalty), regardless of whether the borrower refinances or sells. The other options don’t describe this concept: requesting a second mortgage isn’t related to prepayment penalties, and a fee for closing costs is separate from prepayment protection.