What is a penalty associated with paying off a mortgage before the scheduled due date?

A pre-payment penalty is a charge incurred when a borrower pays off their mortgage early, whether by refinancing, selling the property, or making extra payments toward the principal. Lenders impose this fee to recover some of the lost interest income that would have been derived from the loan if it had continued to be paid over the originally scheduled term. This penalty is a way to protect the lender's financial interest, as it compensates for the potential loss of expected revenue if a borrower pays off the mortgage sooner than anticipated.

The other options present different types of penalties or fees not directly related to early mortgage repayment. A late payment fee applies when a borrower fails to make a mortgage payment by the due date, thus penalizing delinquency rather than prepayment. A modification fee might occur if a borrower seeks to change the terms of an existing mortgage, which is unrelated to early repayment penalties. Lastly, a default penalty pertains to situations where a borrower fails to adhere to the terms of the loan, specifically leading to foreclosure or other forms of legal action, rather than being linked to the voluntary early payoff of a mortgage.