Prepayment Penalty
Quick answer
A prepayment penalty is a fee charged when a borrower repays a loan before the end of an agreed protection period.
Lenders price loans expecting to hold them for a stated term, so most long-term commercial and investment property loans include prepayment protection. It may take the form of a declining percentage of the balance, a fixed number of months of interest, a yield-maintenance calculation, or defeasance. Understanding the penalty structure matters most when a sale or refinance is likely before maturity.
Related product: Permanent Debt
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