mortgage loan clousing process What is a prepayment penalty in mortgage loan , A prepayment penalty refers to the fee the bank charges if you want to repay the loan amount before the mortgage loan term. This is done because when borrowers choose to repay the amount before the end of the actual loan term, the bank lose out on a large amount of interest of loan terms To compensate for this loss, mortgage loanprepayment penalties are charged by some banks.