Prepayment Penalty

A prepayment penalty is a fee a lender charges when a loan is paid off before a set date. BRRRR plans depend on paying off the short-term loan early and sometimes refinancing again later, so penalties on either loan can take cash straight out of the deal.

Some hard money loans have a minimum interest period, charging several months of interest even if the refinance happens sooner. Some long-term investor loans carry a penalty that steps down over the first few years. Both terms are negotiable at the start and hard to change later.

Consumer mortgages on a primary home face federal limits on prepayment penalties, but business-purpose loans on rentals often do not. Reading the note for the penalty schedule matters most when the investor expects to sell or refinance the rental within a few years.

Further reading: Prepayment Penalty on Wikipedia.