What is a prepayment penalty?

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Some mortgages have prepayment penalties written into them. This means you will have to pay the lender a percentage of the principal, or some other stated amount, if you decide to repay the loan early.

The prepayment clause is usually in effect for only one to three years and may be waived for special circumstances. Lenders impose the penalty to recover any losses related to your early payment.

Ask about prepayment penalties before signing for a home loan. If you are applying for a new loan, the penalty should be disclosed in the truth-in-lending statement.

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