fee paid to a lender for the privilege of paying off a loan prior to maturity. A prepayment penalty, which may decline in the years after a mortgage was originally booked, is intended to compensate the lender for loss of income in future years. These are becoming less common as more mortgages are made at adjustable rates that rise or fall according to a Cost Of Funds Index or a bank lending rate, such as the six-month Treasury bill rate, libor, or the bank prime rate.
fee paid by a borrower for the privilege of retiring a loan early. A prepayment penalty on a personal loan or home mortgage is not a tax deductible interest expense.
fee paid by a borrower to a bank when a loan or mortgage that does not have a prepayment clause is repaid before its scheduled maturity. Prepayment penalties are prohibited in many states, and by FANNIE MAE and freddie mac. Also called prepayment fee.
fees paid by borrowers for the privilege of retiring a loan early.
Example: Abel borrowed $200,000 last year at 6% interest on a 30-year mortgage. If he pays the remaining principal now, in one lump sum, there will be a 5% prepayment penalty that amounts to $10,000.
