What is the impact of a prepayment penalty on a mortgage loan?

A prepayment penalty is a clause in a mortgage or loan contract that imposes a fee on the borrower for paying off the loan early. This penalty is typically designed to protect the lender's interest, as lenders rely on the interest payments from the loan over its full term. When a borrower pays off their mortgage early, the lender loses out on future interest income they anticipated receiving.

By charging a fee for early repayment, the lender is compensated to some extent for this lost interest. This can make the option of early repayment less attractive to the borrower, as they may need to consider this additional cost when deciding whether to pay off the loan sooner than scheduled.

The other options suggest benefits or situations that do not align with the nature of a prepayment penalty. For example, while reducing the total interest paid would generally be a goal for borrowers, a prepayment penalty can result in a financial disincentive to pay off the loan swiftly. Thus, the correct understanding of a prepayment penalty is that it specifically charges a fee for early repayment, making option B the accurate choice.