DEFINITION of 'Prepayment Privilege'

The right given to a debt holder to pay all or part of a debt prior to its maturity or ahead of schedule, usually without risk of penalty. Prepayment privileges are often elements of such debts as mortgages or automobile loans. They are in opposition to a prepayment penalty, which is the amount set by the lender as a penalty to the debtor for paying off a debt prior to its maturity in order to recoup a portion of the lost interest the lender had planned to earn.

BREAKING DOWN 'Prepayment Privilege'

Fixed-income securities that incorporate prepayment privileges are considered riskier to the debt holders because they are not certain as to when they will receive the cash flow of incoming funds. Prepayment tends to occur when interest rates are low and mortgage refinancing is viewed as favorable.

RELATED TERMS
  1. Prepayment Penalty

    A clause in a mortgage contract that says if the mortgage is ...
  2. Constant Percent Prepayment

    Annualized estimate of mortgage loan prepayments, computed by ...
  3. Public Securities Association Standard ...

    An assumed monthly rate of prepayment that is annualized to the ...
  4. Burnout

    A period of slowing mortgage prepayment within a mortgage backed ...
  5. Extension Risk

    The risk of a security's expected maturity lengthening in duration ...
  6. Refinancing Risk

    1. The risk that an early unscheduled repayment of principal ...
Related Articles
  1. Investing

    Defeasance Reduces Commercial Real Estate Fees

    Try this alternative to short-term variable-rate financing when using leverage to buy property.
  2. Personal Finance

    7 Steps to Help Pay off Your Mortgage in Retirement

    A monthly mortgage payment can be hard to handle in retirement if you're not ready.
  3. Investing

    Explaining Debt Service

    Debt service is a measure of a person or entity’s use of cash to pay interest and principal on debt obligations.
  4. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  5. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    As people reach retirement they are carrying more debt than ever before. Why and what to watch for.
  6. Personal Finance

    Why Debt Isn’t Always a Bad Thing

    When managed properly, debt can be used to achieve a higher overall rate of return.
  7. Financial Advisor

    When Paying Down Debt Doesn't Make Sense

    Learn how to know when you should pay off a debt or add to your savings.
  8. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
RELATED FAQS
  1. I made involuntary contributions to a retirement plan while temporarily employed. ...

    Your options depend on the type of penalty that would apply. If the penalty is a surrender charge or another penalty that ... Read Answer >>
  2. Should I cash out of mutual funds to pay off debt?

    Learn how cashing in your mutual funds is not the best idea for low interest rate debt unless it used as a last resort due ... Read Answer >>
  3. Does the IRS charge interest on penalties?

    Understand whether or not the IRS charges interest on penalties. Learn about the types of penalties that can be assessed ... Read Answer >>
Hot Definitions
  1. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  2. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  3. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  4. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  5. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  6. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
Trading Center