One way banks may try to reduce prepayment associated with mortgage loans is to charge a “prepayment penalty” if you pay off the loan during a penalty period - some charge the fee only for a refinance, others for any reason say during the first 5 years of the loan.   The bank may offer lower origination fees in exchange for the penalty.   Assume the initial loan of $250,000 is for a 30 year FRM at 4%.

Let’s assume the penalty is 6 months of interest for prepayment. After 1 year (end of month 12) you decide to move – What is the amount of the penalty you would pay, i.e. the total interest on months 13 – 18 you would have paid? (Round to the nearest cent)

Answer rating: 100% (QA)

To calculate the penalty amount for prepayment after 1 year end of month 12 on a mortgage loan we ne... View the full answer