In accordance with federal law, a mortgage loan may only include a prepayment penalty if the loan is:

A mortgage loan may include a prepayment penalty under federal law only if the loan is not classified as a high-cost mortgage. High-cost mortgages are subject to specific regulations under the Home Ownership and Equity Protection Act (HOEPA), which aims to protect borrowers from abusive lending practices. One of the provisions is that high-cost mortgages cannot include prepayment penalties to ensure borrowers have the ability to pay off their loans without facing additional financial burdens.

In contrast, if a mortgage is not a high-cost mortgage, it may include a prepayment penalty, making it a viable option for lenders who want to protect their investment. The other options—whether the loan is a qualified mortgage, a variable-rate mortgage, or a fixed-rate mortgage—do not specifically define the conditions under which a prepayment penalty is permissible. It is the classification of the mortgage as a high-cost loan that is crucial in determining the legality of a prepayment penalty.