Will borrowers face a penalty if they pay-off their loan early?

No, they will not. Life happens, circumstances change, and we can live with that. Borrowers who chose the non-repayable grant option will keep that and any additional equity they build by the time they sell the home or pay-off the mortgage. Borrowers who chose the deferred 2nd loan will not make any payments on it until they pay-off their 1st mortgage, at which point the 2nd loan is due and typically payable from the proceeds of the sale or refinance.