SOFE
AFE · Question #173
Prepayment of a conventional mortgage loan, prior to its specified maturity, is discouraged through the general market acceptance of significant prepayment penalties. Often these penalties are…
The correct answer is A. Lower than the rate on the loan being repaid, the borrower has to make up the interest rate differential and the lender is essentially "made whole" for a potential loss of interest. See the full explanation below for the reasoning.
Question
Prepayment of a conventional mortgage loan, prior to its specified maturity, is discouraged through the general market acceptance of significant prepayment penalties. Often these penalties are calculated so that when prevailing market interest rates are:
Options
- ALower than the rate on the loan being repaid, the borrower has to make up the interest rate differential and the lender is essentially "made whole" for a potential loss of interest.
- BGreater than the rate on the loan being repaid, the borrower has to make up the interest rate differential and the lender is essentially "made whole" for a potential loss of interest.
- CEqual to the rate on the loan being repaid, the borrower has to make up the interest rate differential and the lender is essentially "made whole" for a potential loss of interest.
- DLower than the rate of interest being paid to the borrower has to make up the interest rate differential and the lender is essentially "made whole" for a potential loss of interest.
How the community answered
(41 responses)- A85% (35)
- B2% (1)
- C5% (2)
- D7% (3)
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