What Is Prepayment?

A prepayment is when you settle a debt or make an installment payment before the official due date. An individual, corporation or another type of organization can make a prepayment.

Prepayments are made either for an upcoming payment paid in advance or for the entire balance of a liability. Examples of these are rent, early loan repayments, and future tax obligations.

In real estate, prepayment is not always as straightforward as with other forms of debts. Prepayment of a mortgage loan, for example, may come with a prepayment penalty as specified in a prepayment penalty clause.

The penalty is imposed when mortgage prepayments are made before a certain period of time elapses. Lenders see the prepayment penalty as a means to recoup some or all the expenses associated with putting a new loan on the books. You see, a lender incurs a significant loss if a mortgage is repaid quickly as in the case of a refinance.

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Not all lenders impose the prepayment penalty, however. The clause must be set out in the mortgage contract so lenders will be able to collect one.

Apart from a prepayment of a mortgage loan, there is prepayment of real estate and/or personal property taxes. Taxpayers may make prepayments of any amount to settle their upcoming tax bills.

In some states, there is a so-called real estate tax prepayment program. This is where all provisions of real estate tax prepayments are outlined, including when prepayments will be received by the concerned agency and the amount to be paid, which can be between 100% and 105% of the total tax amount of a specific tax year.


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