Finance
A prepayment penalty clause in a mortgage:
ARequires the borrower to make extra payments in the first 5 years
BCharges the borrower a fee for paying off the loan early✓ Correct
CPrevents the borrower from refinancing
DProtects the borrower from payment increases
Explanation
A prepayment penalty is a fee charged to borrowers who pay off their mortgage balance early, in whole or in part. Lenders use these clauses to recoup anticipated interest income when a borrower refinances or sells.
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Key Terms to Know
Debt-to-Income Ratio (DTI)
A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
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