I didn’t know this when I bought my house but prepayment penalties are actually quite illegal in the state of Maryland. This link is to the story of a man who refinanced his home with Provident bank , who agreed to waive his closing costs (of around $700) as long as he kept the loan for 3 years. Well, he didn’t keep it for 3 years and so they dinged him for the closing costs. The lawyer’s claim is that since the only way to trigger this fee is when you prepay your loan, it’s a prepayment penalty. If it looks like a duck, smells like a duck, and quacks like a duck… it’s a duck.
I’m a little split on this because on one hand, prepayment penalties are illegal and it sure looks like a prepayment penalty. On the other hand, he knew what he agreed to when he signed his refinance documents. It looks like he discovered the payment was illegal after he signed the documents (and made the payment) and now wants to save himself the $681 and earn himself an extra $1400 plus interest… that doesn’t sit well with me.