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.
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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.