A prepayment penalty is a fee that is charged by some lenders when you refinance a loan or pay it off before the term of the loan is up. A common prepayment penalty fee is 5% of the amount borrowed. For example, $7,500 would be the cost of a prepayment penalty on a $150,000 mortgage. Prepayment penalties should be avoided because they are an added expense that erodes home equity. Borrowers need to ask questions about this and read their loan documents carefully. Prepayment penalties are very common in high-cost subprime loans.
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