Prepayment Penalty

What is a 'Prepayment Penalty'

A prepayment penalty is a clause in a mortgage contract that says if the mortgage is prepaid within a certain time period, a penalty will be assessed. The penalty is usually based on percentage of the remaining mortgage balance or a certain number of months worth of interest.

A prepayment penalty that applies to both the sale of a home and a refinancing transaction is called a "hard" prepayment penalty. A prepayment penalty that applies to refinancing only is called a "soft" prepayment penalty.

BREAKING DOWN 'Prepayment Penalty'

Lenders write prepayment penalties into mortgage contracts to compensate for prepayment risk. As the incentive for a borrower to refinance a subprime mortgage is high, many subprime mortgages have prepayment penalties.

A borrower should be aware of the risks associated with a prepayment penalty. A prepayment penalty can substantially increase the cost of refinancing a mortgage when it would otherwise be economical.

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RELATED FAQS
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    Learn how prepayments for various services such as insurance, rent and supplies are included as part of a company's current ... Read Answer >>
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    Learn whether FHA loans have prepayment penalties, and find out the rules governing interest charges when prepaying your ... 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 >>
  4. Are IRS penalties tax deductible?

    Learn about penalties assessed by the U.S. Internal Revenue Service and how the IRS does not taxpayers to deduct them on ... Read Answer >>
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  6. I have found myself unable to work at this time due to cancer, but it is temporary. ...

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