Loan mechanics
Prepayment penalty
A charge for repaying a loan ahead of schedule
It compensates the lender for interest it will not now receive. Federal and state rules restrict these on many residential loans, and some loan programs prohibit them entirely.
How the exam asks about it
Do not confuse it with a discount point. A point is paid at the start to lower the rate; a prepayment penalty is paid at the end for paying off early.
Related terms
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