Question

The seller was told by the bank that she has a prepayment penalty due at the time of closing the penalty is 6 months’ interest on the current loan balance. Based on 6% interest, her month payment is 569.57 principal and interest, and her loan balance was $95,000.00 the moth before closing. Once she makes her next monthly payment, how much will she owe in Prepayment penalty at the time of closing

Answer 1

The seller will owe $2,847.16 in prepayment penalty at the closing of the loan balance.

Some lenders include prepayment penalties in their loan agreements. This penalty represents a fee that they charge the borrowers for paying off all or a portion of their loans before their expiration or maturity date.  The purpose is to discourage borrowers from repaying loans before the due date.

Data and Calculations:

Prepayment penalty = 6 months' interest on current loan balance

Current loan balance = $95,000

Current monthly payment = $569.57

Month's interest on loan = $475 ($95,000 x 6% x 1/12)

Principal repayment = $94.57 ($569.57 - $475)

Closing loan balance = $94,905.43 ($95,000 - $94.57)

Prepayment penalty = $2,847.16 ($94,905.43 x 6% x 6/12)

Thus, the prepayment penalty that she will owe at the closing of the loan is $2,847.16, which is six months' interest on the loan balance.

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