Prepayment Penalty Definition

A prepayment penalty is a fee that lenders charge to borrowers who pay off loans "early." Loans like auto loans and home loans are typically scheduled to last for a certain number of years (known as the term), with the loan balance reaching zero at the end of the term.

A prepayment penalty, also known as a "prepay" in the industry, is an agreement between a borrower and a bank or mortgage lender that regulates what the borrower is allowed to pay off and when. Most mortgage lenders allow borrowers to pay off up to 20 percent of the loan balance each year.

Prepayment penalty. function: noun. definition 1: A charge imposed by a mortgage lender on a borrower who wants to pay off part or all of a mortgage loan in advance of schedule. Many borrowers elect to not have a prepayment penalty if they intend to pay off their loan, or.

Our definition and calculation of these non-GAAP financial. losses on extinguishment of debt and debt modification costs (includes prepayment penalties incurred and the write-off of unamortized.

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The “Yield Maintenance” prepayment penalty is the calculation of that lost income, which is a factor of the original rate, current market rates, and the remaining term of the loan. For instance, let’s assume an investor borrows ,000,000 at 5% for 10 years, and his loan has a prepayment penalty. On year five he wins the lottery and decides to pay off the loan early.

The Federal Reserve is inviting public comment on a rule that would provide four options for complying with new amendments to the Truth in. or creditor to a loan originator; and (3) the prepayment.

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Therefore, penalty periods are generally one, two, or three years long. There are two types of prepayment penalties, hard and soft. A hard prepayment penalty is the stricter of the two and requires a penalty fee if the borrower sells or refinances his home before the set time has lapsed.

Deeper definition. A hard prepayment penalty is a penalty that’s assessed when the mortgage is paid off due to the borrower selling the home or refinancing the mortgage. A soft prepayment penalty only applies to mortgages that are refinanced. lenders include prepayment penalties in mortgage contracts to protect themselves from prepayment risks.

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