---
title: Prepayment Penalty
description: A prepayment penalty is a mortgage provision that states that a penalty, or fee, will be assessed to a borrower if an outstanding liability is paid off before a certain time period.
---

[Realized 1031 Glossary of Terms ](https://www.realized1031.com/glossary)

# [Prepayment Penalty](https://www.realized1031.com/glossary/prepayment-penalty)

 Written by [The Realized Team](https://www.realized1031.com/glossary/author/the-realized-team) | Jun 21, 2022 12:00:00 PM

A prepayment penalty is a mortgage provision that states that a penalty, or fee, will be assessed to a borrower if an outstanding liability is paid off before a certain time period. Lenders typically calculate these fees as a percentage of the outstanding loan balance, the cost of lost interest payments, or as a flat fee. For example, if $300,000 of principal is still owed on a mortgage and a lender charges a 2% prepayment penalty, the borrower would owe an additional $6,000 in fees to the lender for the privilege of repaying the loan before its maturity date.

These fees are used in practice to protect a lender from the loss of interest payments that would have been received if the borrower had not prepaid the loan balance early.

 

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