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Prepayment Penalty Calculator

Enter your balance and penalty terms to estimate the early-payoff cost.

How it is calculated

The tool has two penalty types. In % of balance mode the penalty is balance × pct / 100, where pct is the percentage your contract names for the current moment. In months of interest mode it is balance × (rate / 100 / 12) × months, where rate is the annual loan rate in percent and months is how many months of interest the lender charges. The second figure shown, the effective percentage, is penalty / balance × 100, which lets you compare the two types. Only the fields of the selected type are used. The tool applies one percentage or one month count; it does not step down over the years, so enter the value that applies on your payoff date.

Worked example

Remaining balance $250,000, penalty type months of interest, annual rate 6.5%, 6 months charged. Monthly rate: 6.5 / 100 / 12 = 0.0054167. One month of interest: 250,000 × 0.0054167 = $1,354.17. Six months: 1,354.17 × 6 = $8,125.00. The effective penalty is 8,125 / 250,000 × 100 = 3.25% of the balance.

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Common mistakes

  • Entering the original loan amount rather than the remaining balance. The penalty is charged on what you still owe, so use the payoff figure from your latest statement.
  • Leaving the penalty type on % of balance while filling in rate and months. The rate and month fields are ignored in that mode, so the result will not change.
  • Entering the interest rate as a monthly rate. The field is the annual rate in percent; the tool divides it by 12 itself.
  • Using the percentage from year one of a step-down schedule when you are in year three. The tool does not know the date, so type the percentage that applies on the day you pay off.
  • Forgetting other payoff costs. The result is only the penalty; accrued interest, fees and any lender charges come on top.

Sources

About this calculator

Lenders typically write prepayment penalties one of two ways: as a declining percentage of the remaining balance (common step-down schedules go something like 3%-2%-1% across the first three years, then 0%), or as a flat number of months of interest on the payoff amount, similar to how many mortgage and commercial loan penalty clauses are worded. This calculator applies whichever method your loan uses to the balance and terms you enter.

Homeowners and business borrowers use it before refinancing or selling to see whether the interest they'd save is worth the penalty they'd pay, while mortgage brokers and financial advisors use the same math to compare payoff scenarios across competing loan offers for a client.

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Comments (1)

  • Editorial team

    Start with the size of the penalty against what refinancing saves. A quick way to judge a penalty is to set it against what leaving the loan saves you. On the default example, a penalty of 8,125 on a 250,000 balance is repaid in about 3.25 years if refinancing cuts the rate by one full point (roughly 2,500 a year), before any new closing costs. Which break-even horizon would make you go ahead: two years, five, or longer?

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