Which type of mortgage includes a prepayment penalty clause requiring a specified percentage to be paid if the loan is paid off early?

The correct answer pertains to a conventional mortgage, which may include a prepayment penalty clause. This clause stipulates that if the borrower pays off the loan early, either by refinancing or selling the property, they will incur an additional fee calculated as a specified percentage of the remaining loan balance.

Conventional mortgages are often more flexible in terms of terms and conditions, allowing lenders to include various clauses based on their risk management strategies. As such, lenders might use prepayment penalties to ensure that they achieve a certain yield on the loan over its intended life, discouraging early payoff by the borrower.

FHA mortgages, on the other hand, are typically designed to make homeownership more accessible and do not usually include prepayment penalties, as regulations discourage such clauses. VA loans are benefit-based and similarly do not customarily contain prepayment penalties to accommodate veterans and their families. Adjustable rate mortgages, while they can include various terms, are more focused on the fluctuations in interest rates, rather than prepayment penalties specifically.

Understanding these specifics helps borrowers make informed decisions about the types of mortgages available and the potential costs involved, particularly if they plan to pay off their loan early.