To explain hard vs. soft prepayment penalty on a mortgage loan, imagine that you sign a home loan and you have a prepay penalty clause of 4-month interest.
Prepayment penalties. A prepayment penalty is a fee that your lender may charge if: you make more than the allowed additional payments toward your mortgage; you break your mortgage contract; Your lenders may call the prepayment penalty a prepayment charge or breakage cost. prepayment penalties can cost thousands of dollars.
Prepayment Penalty Law and Legal Definition Prepayment penalty is a charge assessed against a borrower who elects to pay off a loan before it is due. It is a fee that a lender may assess if a borrower repays a loan before the scheduled maturity.
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 penalty may or may not apply to prepayment resulting from a home sale. A penalty that applies whether the loan is prepaid because of a sale or because of a refinancing is referred to as a ‘hard’ penalty. A penalty that applies only to a refinancing is a ‘soft’ penalty.
Definition of PREPAYMENT PENALTY: A penalty imposed on the borrower for the complete settlement of the loan before the expected payoff date. It is means of compensation for the lender as The Law Dictionary Featuring Black’s law dictionary free Online Legal Dictionary 2nd Ed.
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As another way to compensate for prepayment risk (which is a reinvestment risk), a prepayment penalty clause is often included in the loan contract. "Soft" prepayment terms can allow prepayment without penalty if the home is sold. "Hard" prepayment terms do not allow any exceptions without penalty.
When prepayment penalties apply, how lenders calculate them, when you must pay them and how to take advantage of prepayment privileges.
Prepayment penalty : read the definition of Prepayment penalty and 8,000+ other financial and investing terms in the NASDAQ.com Financial Glossary.