Prepayment Penalty

Prepayment Penalty means:
a fee paid by a borrower for the privilege of retiring a loan early. A prepayment penalty on a personal loan or home mortgage is not a deductible interest expense.

Example of Prepayment Penalty:

Learn more about tax examples, explanations and calculations here.

Tony borrowed $50,000 last year at 15% interest on a 30-year mortgage. If he pays the remaining principal now, in one lump sum, there will be a 5% prepayment penalty that amounts to $2,500.