Prepayment Penalty

A prepayment penalty is a fee charged by a lender if you pay off your mortgage or a portion of your mortgage early, before the end of the mortgage term.

Prepayment penalties are designed to compensate the lender for the loss of interest income they would have earned if you had continued to make payments according to the original mortgage schedule.

The amount of the prepayment penalty can vary depending on the type of mortgage and the lender. It’s important to understand the prepayment penalty terms before signing a mortgage agreement, especially if you anticipate that you may want to pay off your mortgage early.

Open mortgages don’t have prepayment penalties, but typically have higher interest rates.

• Related Terms: Mortgage, Loan, Fee, Interest Rate, Mortgage Term