Prepayment penalty

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Updated: 3/27/2003 1:09 pm
A prepayment penalty is a fine charged against you by the lender of your mortgage if you pay off the loan before its life is up. The purpose of the prepayment penalty is to discourage a borrower from replacing his or her existing loan with a new loan if interest rates drop. Today, many lenders do not charge a prepayment penalty. Shopping for a mortgage that does not carry a prepayment penalty will save you a substantial amount of money should you decide to pay off the loan early. As long as there is no prepayment penalty clause in your mortgage agreement, you can save a lot of money by paying a little bit extra every month. Since mortgages will vary on how prepayment will affect the total amount of your debt, you will want to understand your mortgage agreement and possibly seek further advice before deciding to pay off the mortgage early. For more information on prepayment penalties, contact a financial or real estate professional.

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