Prepayment Penalty Mortgage (PPM)

Definition - What does Prepayment Penalty Mortgage (PPM) mean?

A prepayment penalty mortgage is a mortgage that has a clause in the contract that states that penalties can be charged if the borrower makes a significant prepayment or refinances the mortgage. The purpose of prepayment penalty mortgages is to prevent lenders from missing out on the profits they would otherwise make from interest if the borrower did not prepay or refinance.

Justipedia explains Prepayment Penalty Mortgage (PPM)

An example of a prepayment penalty mortgage is a mortgage that costs $200,000.00, but has a prepayment penalty of $5,000.00. So, in this circumstance, it could cost the borrower $5,000.00 to make a significant prepayment or to get the entire mortgage refinanced. When making decisions about repaying, borrowers often weigh the cost of the penalties versus the potential savings they could make by paying portions of the mortgage in advance.

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