The other type of prepayment penalty is a Hard Prepayment penalty, which is more common. In the case of a hard prepay, the penalty is administered regardless of whether the note is paid off as a result of a sale or refinance.

Typically, Prepayment Penalties are equivalent to 6 months of mortgage interest or 4-5% of the total loan amount. 2% of conventional mortgages have prepayment penalties while nearly 80% of subprime loans have them.

Bankapedia's Take

Curious as to why a bank would enforce a prepayment penalty only in the event of a refinance? Theories may vary, but the general consensus is that given that most prepayment penalties are the result of a subprime loan, the borrower most likely will being paying this note off via refinancing into conventional loan and not by selling the property. On a conventional mortgage, unless there is a drastic drop in rates, the note is only being paid off via home sale.

Subprime lenders lure the borrower into the loan thinking they can get out of the note without a penalty and the term "soft prepay" takes the edge off of things as well.