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Common Terms 1   Common Terms 2

Prepayment Penalty

Function: noun

Definition 1:
A charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule. Many borrowers elect to not have a prepayment penalty if they intend to pay off their loan, or any part of the loan before its scheduled to be paid. It is common for a loan to not have a prepayment penalty if the loan is pre-paid after the first three years of the loan have passed. A prepayment penalty is usually expressed in the form of a percentage of the unpaid balance at the time of prepayment, or a specified number of months of interest. In many cases, a prepayment penalty may lower the interest rate on a loan due to the fact that it allows more stability for the lender. One other disadvantage of having no prepayment penalty, is that it is a loan option that it often slows down the loan origination process. In many loans, its not possible to avoid the prepayment penalty. A borrower should carefully consider the pros and cons of not having a prepayment penalty since there are several disadvantages associated with not having one.