A fee some lenders charge a borrower for paying off a loan before its scheduled maturity.
Why Prepayment Penalty matters on the exam
This term belongs to Financing. The questions below are real items from Freehold's bank that use it - each one cites its source.
Exam questions using Prepayment Penalty
Every Freehold question shows why the right answer is right — and cites its source.
A home sells for $610,000 with a 6.5% commission, $7,200 in closing costs, a $310,000 loan payoff, and a 2% prepayment penalty on the loan payoff balance. What are the seller's net proceeds?
$254,150
$240,950
$246,950
$253,150
Show answer & explanation
$246,950 — Commission is $610,000 × 6.5% = $39,650, and the prepayment penalty is $310,000 × 2% = $6,200. Net proceeds are $610,000 − $39,650 − $7,200 − $310,000 − $6,200 = $246,950.
Source: PSI National Real Estate Exam Content Outline §11 Real Estate Calculations
A prepayment penalty clause in a note is designed to:
Compensate the lender for interest income lost when a loan is paid off ahead of schedule
Reward borrowers who pay the loan off ahead of schedule
Require the borrower to make at least the minimum monthly payment stated in the promissory note
Prohibits the borrower entirely and completely from ever making any extra principal payments whatsoever
Show answer & explanation
Compensate the lender for interest income lost when a loan is paid off ahead of schedule — A prepayment penalty compensates the lender for anticipated interest income it loses when a borrower pays off or substantially pays down the loan before the scheduled term.
Source: PSI National Real Estate Exam Content Outline §4 Financing
Which loan is most likely to be prohibited from including a prepayment penalty?
A conventional jumbo loan
An FHA-insured loan
A commercial loan
A private seller-financed note
Show answer & explanation
An FHA-insured loan — FHA-insured loans do not permit prepayment penalties, allowing borrowers to pay off or pay down the loan early without additional charges, unlike some conventional or private notes.
Source: PSI National Real Estate Exam Content Outline §4 Financing
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