Prepayment Penalty is kind of penalty that the lender charges if you close the loan and pays him off before the date of the loan term. The lender actually charges a certain percentage of the outstanding balance of the loan as the prepayment penalty. This penalty declines with time and if you remain on the contract five years, the lenders generally don’t charge this penalty. So if you want to refinance from another lender because of lower rate, check that will refinancing ultimately benefit you after paying off the Prepayment penalty.