prepayment penalty

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A prepayment penalty clause is common in mortgage contracts, and it specifies that if the borrower pays down or pays off the mortgage early, usually within the first five years of the loan, a penalty will be levied. The prepayment penalty safeguards the lender from the loss of interest income that would have accrued if the loan had not been prepaid. The penalty is sometimes calculated as a percentage of the remaining mortgage debt, or as a fixed number of months' interest.

[Last updated in April of 2022 by the Wex Definitions Team]