Prepayment Penalty Mortgage Law and Legal Definition

Prepayment penalty mortgage is a mortgage that requires a borrower to pay penalty for prepayment, partial payment or for repaying the entire loan within a specified time period. Prepayment penalty is mostly charged in cases where s/he pays one or more monthly payments before the due date. Prepayment penalty is usually included as a clause in a mortgage agreement.

A prepayment penalty that applies to the sale of a home and a refinancing transaction is called a “hard” prepayment penalty. A prepayment penalty that applies to refinancing is called a “soft” prepayment penalty.

The prepayment penalty is usually calculated over the remaining or the outstanding balance at the time of prepayment. Prepayment penalty usually decline in the passage of time.