Real Estate Glossary

What is Prepayment Penalty?

Prepayment Penalty - A prepayment penalty is a fee that is charged to a borrower if they pay off their loan before the end of the loan term. This type of penalty is meant to discourage borrowers from paying off their loans early, as it can result in lost interest income for the lender. Prepayment penalties can be a percentage of the loan balance or a flat fee and are typically spelled out in the loan agreement.