Definition
A fee charged for paying off a mortgage early, compensating lenders for lost interest income. It's the bank's way of punishing you for financial responsibility and denying them years of interest payments.
Example Usage
The commercial loan included a 3% prepayment penalty in the first five years, costing them $90,000 to refinance when rates dropped.
Origin
Lending terminology protecting creditor interests, increasingly regulated in residential mortgages since the 2008 financial crisis
Fun Fact
Prepayment penalties are now restricted or prohibited on many residential mortgages but remain common in commercial real estate loans, sometimes using 'yield maintenance' formulas that can cost millions.
Source: Mortgage lending regulations
Related Terms
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