A charge the lender makes when a mortgage is repaid before a certain period of time elapses. In effect, you are "penalized" for paying off your mortgage early. Not all lenders impose a prepayment penalty.
From a mortgage lender’s perspective a prepayment penalty helps the lender at least recoup some or all of the significant expense it incurs in putting a new loan on the books. If the loan is to be repaid quickly, such as if you refinance it elsewhere, the lender can incur a loss, as it has not had time to make up the costs it advanced. Lenders also know a mortgage prepayment penalty discourages prepayment.
Check your mortgage. A prepayment penalty provision must be set out for the lender to collect one. If you are applying for a new loan any prepayment penalty should be disclosed in the truth-in-lending statement.
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