We understand how frustrating it can be to search for a home in Austin. Half the battle is learning the key terms and what they mean in regards to Texas real estate. So each week we bring you Key Term Tuesday – our way of helping you decode the industry jargon that keeps you from owning your home search.
What is a Prepayment Penalty
A prepayment fee is a fee that a lender charges the borrower who chooses to pay off their loan before a certain date. Lenders make money on the interest charged in a loan, so a prepayment fee is a way for them to make up for lost revenue when the borrower pays off the loan before maturity.
The prepayment fee usually applies when the loan is paid off within the first 5 years of the loan term. Depending on the situation, prepayment fees can be steep – as much as 20% balance due on the loan. Loan documents will clearly state whether a prepayment penalty exists and what it costs.
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