Mortgage Dictionary

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Prepayment Penalty

A prepayment penalty is a fee charged by a lender when the borrower repays the loan before the end of its term. Prepayment penalties exist to compensate the lender for interest and other charges that would otherwise be lost.

Warning Before you accept a mortgage with a prepayment penalty, find out how long the penalty is in force and what the penalty is. If the penalty seems excessive, get a different mortgage. To see how how to evaluate prepayment penalties, read the prepayment case study.

Normally, prepayment penalties are only charged during the first 3 to 5 years of the mortgage. And loans with prepayment penalties usually have lower interest rates than loans without prepayment penalties.

See also:   Mortgage and Home Financing Costs