A prepayment penalty, also known as a “prepay” in the industry, is an agreement between a borrower and a lender that regulates what the borrower is allowed to pay off and when.

Paying off a mortgage early can happen in a variety of ways. If you sell your home, that is one way to paying off the loan in full. And if you refinance the loan, you effectively pay off the mortgage as well by replacing it with a shiny new one.

A prepayment penalty sticks the borrower with a penalty if they sell their home OR refinance their mortgage.