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Prepayment Privilege

Prepayment privileges let borrowers make extra payments within limits without penalty, helping reduce interest and pay down mortgages faster.

Prepayment Privilege

September 30, 2025


What is Prepayment Privilege?

A prepayment privilege is a feature in many closed mortgage contracts that allows borrowers to make extra payments or increase regular payments within specified limits, without penalty. These privileges are usually expressed as a percentage of the original mortgage amount.

Why Prepayment Privilege Matters in Real Estate

Prepayment privileges matter in real estate because they enable borrowers to pay down their mortgages faster, reduce interest costs, and shorten amortization periods. They offer limited flexibility within closed mortgage structures.

Example of Prepayment Privilege in Action

A borrower with a $400,000 mortgage has a prepayment privilege of 15%. They can make an annual lump-sum payment of up to $60,000 without penalty, accelerating repayment.

Key Takeaways

  • Allow extra payments without penalty within limits.
  • Help borrowers reduce interest costs and amortization.
  • Typically offered as a percentage of the mortgage amount.
  • Increase repayment flexibility within closed mortgages.
  • Key feature to compare when selecting lenders.

Related Terms

Additional Terms

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