States Continue to Amend Mortgage Prepayment Penalty Laws in 2026
This year, several states have eased prepayment penalty restrictions for business-purpose mortgage loans, and a few other states are considering similar legislation. Additionally, two states have strengthened prepayment rights for consumers.
States that previously prohibited or restricted prepayment penalties on all mortgage loans are increasingly applying those restrictions only to consumer-purpose mortgage loans (i.e., mortgage loans made primarily for personal, family or household purposes) or mortgage loans secured by an owner-occupied dwelling. According to some state legislatures, these amendments are designed to expand lenders’ ability to offer business-purpose loans with reduced interest rates and/or closing costs.
Below is an overview of states that enacted these types of changes in 2026, and a few states where such changes are pending in the legislature:
Rhode Island amended its prepayment penalty laws to clarify that its limitations on prepayment penalties apply only to loans secured by owner-occupied dwellings.
Minnesota’s prepayment penalty restrictions, which prohibit prepayment penalties after 42 months and place certain caps on prepayment fees, no longer apply to certain business-purpose loans. Specifically, the exclusion applies to a purchase money, first lien, or debt service coverage ratio (DSCR) loan if: 1) the loan is made for investment purposes only; 2) no borrower, guarantor, or cosigner intends to or does occupy the property; and 3) the seller does not continue to occupy the property after the sale. For purposes of these provisions, a DSCR loan is a non-QM, investment property loan where the loan decision is based on the property’s expected cash flow instead of the borrower’s personal income.
Kansas, which prohibits prepayment penalties on a “home loan” repaid more than 6 months after execution, amended its law to clarify that this restriction applies only to a consumer-purpose home loan.
Legislation is pending in Michigan (HB 5552), New Jersey (S3694), and Pennsylvania (HB 2391) that would make these states’ prepayment penalty restrictions applicable only to consumer loans, thereby excluding business-purpose mortgage loans.
Meanwhile, a few states have strengthened prepayment rights for consumers:
For mortgages secured by owner-occupied 1-4 family dwellings, Connecticut now requires a lender or servicer to accept a full or partial repayment from a borrower on any mortgage loan made on or after January 1, 2027. While this law does not itself prohibit a prepayment penalty, it prohibits a lender from assessing a prepayment charge if prohibited by federal or state law (however, for FHA loans, a borrower may be required to reimburse the lender up to the full amount of any charge, premium or fee required by any state or federal law or regulation of FHA to be paid by the lender upon prepayment).
While Utah already prohibited prepayment penalties on closed-end consumer loans, the law was amended to eliminate a previous exception that allowed lenders to charge a prepayment penalty on certain subordinate-lien loans.
In evaluating state laws around prepayment penalties, several factors can impact whether a such restrictions apply, including the purpose of the loan (i.e., consumer purpose versus business purpose), whether the property is owner-occupied, and the loan amount (for example, Ohio prohibits prepayment penalties for loans under a certain threshold that is adjusted annually; as of January 1, 2026, this threshold is $116,356).
Mortgage lenders charging prepayment penalties should have processes in place to identify state-specific prepayment penalty requirements and monitor for legislative updates, especially as they relate to business-purpose loans. Based on legislative activity, more changes may be on the horizon.
About the Authors
Allison Schilz is counsel at Mitchell Sandler. She represents mortgage lenders and servicers, financial institutions, and secondary market investors in federal and multistate regulatory compliance, licensing, and transactional matters.
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