reference
glossary.
25 terms
definition
A prepayment penalty is a fee charged by lenders when borrowers pay off their mortgage loan early, either through refinancing or selling the property. This penalty compensates lenders for the interest income they lose when loans are paid off ahead of schedule. Not all mortgages include prepayment penalties, and they are regulated differently by state and loan type.
examples
- —The mortgage included a 2% prepayment penalty if paid off within the first three years.
- —Before refinancing, Tom calculated whether the savings would offset the $4,000 prepayment penalty.
- —FHA loans typically do not have prepayment penalties, making them attractive to borrowers who may move frequently.