Which clause addresses the borrower's right to pay off the loan early and any penalties for doing so?

• A. Prepayment clause
• B. Escrow
• C. Due on sale clause
• D. Insurance provisions

Answer: (A)

Understanding loan terms about paying off a loan early centers on the prepayment clause. This clause specifies whether you can pay more than the scheduled payments or pay off the loan before the term ends, and it lays out any penalties or fees that might apply for doing so. Some loans allow early payoff with no penalty, while others impose a prepayment penalty or a fee to compensate the lender for the lost interest. The other terms serve different functions: an escrow arrangement handles funds for taxes and insurance, a due on sale clause requires full repayment if the property is sold, and insurance provisions state the required homeowners insurance coverage. So, the clause that directly addresses the right to pay early and any penalties is the prepayment clause.