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What Are Prepayment Penalties?


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TERMINOLOGY

Prepayment penalties are a penalty that is incurred whenever you try to pay off your loan early. Here are the basics of prepayment penalties and how they can affect you.

Prepayment Penalties

Prepayment penalties are often included with mortgage loans and other types of loans. With this type of penalty, you are going to have to pay a certain amount of money if you pay off the loan early. In many cases, you will also have to pay a fee whenever you pay more than a certain percentage of the principal of the loan. For example, if you pay more than $10,000 towards the principal of your mortgage in any given year, you are going to have to pay a prepayment penalty.

Cost

Prepayment penalties can vary greatly depending on the size of the loan. Typically, the penalty will be expressed as a percentage of the value of the loan. For example, you might have to pay 3 percent of the loan as a prepayment penalty if you were to pay off your loan before the maturation date.

Impact

This type of penalty is designed to keep you from eliminating the interest that you pay your lender. If you are in a mortgage with a prepayment penalty, it could affect your decision to sell the property or refinance.