Which of the following is true about prepayment penalties?

Prepayment penalties are fees that a borrower may incur if they pay off their mortgage early, either partially or in full. The correct answer is that they must be disclosed to the borrower at closing. This is essential because it ensures that borrowers have a clear understanding of all terms and conditions associated with their loan, including any potential financial implications of paying off the loan early. Transparency in lending practices safeguards borrowers and allows them to make informed decisions regarding their mortgage options.

Understanding prepayment penalties is crucial, and ensuring that they are disclosed helps prevent potential disputes or grievances after the loan has originated. Disclosure is not just a best practice; it is often a regulatory requirement designed to promote fairness in lending.

While it is true that prepayment penalties are not characteristic of all mortgage agreements, they can sometimes be seen, particularly in certain types of loans or with specific lenders. Government-backed loans, like those from FHA or VA, typically do not have prepayment penalties, although this does not apply universally to all loans in the market. The assertion that they cannot be included in loan agreements under any circumstances is inaccurate as certain lenders might include them under specific conditions, as long as they are disclosed properly.