Finance
A Virginia borrower is told their loan has a 'prepayment penalty.' This means:
AThe borrower must pay extra each month
BThe borrower pays a fee if they pay off the loan before the end of the penalty period✓ Correct
CThe lender can demand repayment at any time
DInterest cannot be paid in advance
Explanation
A prepayment penalty is a fee charged by the lender if the borrower repays the loan in full (or above a certain amount) before a specified period ends. QM (Qualified Mortgage) loans limit prepayment penalties.
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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.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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.
Pre-ApprovalA lender's conditional commitment to loan a specific amount to a borrower, based on verified income, credit, and assets.
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