Escrow & Title
What is a prepayment penalty and how should it be handled at closing?
AA fee for paying off a mortgage early that reduces the payoff amount
BA charge some lenders impose for early loan payoff that is included in the mortgage payoff amount✓ Correct
CA penalty for late payment before closing
DA fee for prepaying property taxes
Explanation
A prepayment penalty is a charge imposed by some lenders when a mortgage is paid off before a specified date. When refinancing or selling, the prepayment penalty is added to the loan payoff amount at closing.
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Key Terms to Know
Discount Points
Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Closing CostsFees and expenses paid by the buyer and/or seller at the closing of a real estate transaction, in addition to the property's purchase price.
ProrationThe division of ongoing property expenses (taxes, HOA dues, rents) between buyer and seller at closing based on their respective days of ownership.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
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