Definition
A prepayment penalty is a fee a lender charges if you pay off your mortgage before a certain time. This is a clause you should be aware of when you get your loan.
Understanding Prepayment Penalties
Prepayment penalties can appear in the early stages of discussing loan terms with a lender. They kick in if you decide to pay off part or all of your mortgage ahead of schedule. This might mean paying extra fees if you refinance or sell your home within a few years. Example: If a loan includes a 2% prepayment penalty and you repay $10,000 early, the fee would be $200. It's not about discouraging early payments, but compensating lenders for interest they might miss out on. It doesn't mean you can't pay off your loan early; it just comes with certain conditions.
