A pre-payment penalty is a fee assessed by a lender as a charge to a borrower who makes an advanced payment or pays off a loan earlier than the due date or the payment terms in the agreement.

The penalty fee compensates the lender for the loss of some of the interest that would have been earned had the loan continued for the full mortgage term.

When you’re getting your mortgage, be sure to ask if there are any prepayment penalties on your mortgage. Many people find themselves in a pickle when they either want to sell their place and move, or refinance their mortgage, and get stuck with a prepayment penalty.

Some argue that these fees are totally unecessary, but they’re a crucial source of income for lenders.