Definition: Prepayment options reduce the interest rate in exchange for the borrower paying a fee if the loan is paid off early. Having a three-year prepay option means that you get a much lower interest rate in exchange for getting charged a fee if you pay the loan off in less than three years. Not all loans offer a prepayment option to reduce your rate.

If you are going to live in your home for three years and you desire a lower rate, consider configuring your loan with a three-year prepay option. Otherwise, if you are not going to live in your home for at least three years or you do not care so much about a lower rate, you should consider configuring your loan with a lower prepay option.