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A penalty imposed on a borrower for repaying the loan before its due date. (In the case of a mortgage, this applies when there is not a prepayment clause in the mortgage note to offset the penalty.)National Credit Union Administration - Cite This Source - This Definition
Most lenders allow you to prepay the outstanding balance of a loan at any time without a fee, but some lenders charge a prepayment penalty, often about 2% of the amount you borrowed.
If your loan agreement doesn't have a prepayment clause, which excludes a fee for early termination, the penalty may apply.
Many states prohibit prepayment fees, and they're not allowed on any mortgage loans purchased by Fannie Mae or Freddie Mac. But they are allowed in other states, and lenders may offer a lower rate on loans with prepayment penalties because they are locking in their long-term profit.
Similarly lenders who offer to waive closing costs and points when you refinance may impose a penalty if you pay off the loan within the first few years. But if you're not planning to move, this refinancing deal could save you money.Yahoo Finance - Cite This Source - This Definition
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Extra fees that may be due if you pay off your loan early by refinancing the loan or by selling the home. The penalty is usually limited to the first 3 to 5 years of the loan’s term. If your loan includes a prepayment penalty, make sure you understand the cost. Compare the length of the prepayment penalty period with the first adjustment period of the ARM to see if refinancing is cost-effective before the loan first adjusts. Some loans may have a prepayment penalty even if you make a partial prepayment. Ask the lender for a loan without a prepayment penalty and the cost of that loan.The Federal Reserve Board - Cite This Source - This Definition
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