If your mortgage has a pre-payment penalty and you default, you are still responsible to pay the early payoff fees!

There is a clause in every mortgage called an acceleration clause. This gives the lender the right to foreclosure on the mortgage. When a borrower is late on the payments, the lender is allowed to accelerate the due date of the debt to the present and gives the debtor notice of default demanding the full loan balance be paid at once. Thus foreclose and take away the house.

A pre payment penalty is when a borrower must pay a fee for early repayment of part or the entire mortgage amount due. Perhaps, the borrower agrees to pay the lender an additional 3% of the outstanding principle if they pay it off within the first three years. Most people assume this will never happen or are simply given no choice but to agree. Many loans in the sub-prime category offered loans only with prepayment penalties. It made these high risk/high interest rate loans even more profitable to the investors. The borrowers were typically backed into this type of loan and assumed they would deal with it when the time came.