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Prepayment Penalty
A charge, usually given as a percentage, that is listed
in the terms of a loan. Pre-payment fees are common in lending
because without them, the lender does not make the return
on investment that was anticipated from interest payments.
The amount set by the creditor as a penalty to the debtor for paying off the debt prior to its maturity. The prepayment penalty is charged by the lender to recoup a portion of interest that he had planned to earn when he made the loan.
Example:
On a $200,000 loan amount with 6% interest, a prepayment penalty based on 6 months interest would be $6,000. It's expensive. It may be a tax deduction since it is prepaid mortgage interest, however, if you're paying if off for a refinance, it is also taking away home equity.
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