Prepayment Penalty
A charge, usually given as a percentage, that is listed in the terms
of a loan. Pre-payment fees are common in lending because without them, the lender does
not make the return on investment
that was anticipated from interest payments.
The amount set by the creditor as a penalty to the debtor for paying off the debt prior
to its maturity. The prepayment penalty is charged by the lender to recoup a portion of
interest that he had planned to earn when he made the loan.
Example:
On a $200,000 loan amount with 6% interest, a prepayment penalty based on 6 months interest
would be $6,000. It's expensive. It may be a tax deduction since it is prepaid mortgage
interest, however, if you're paying if off for a refinance, it is also taking away home equity.
