What constitutes "prepayment" in a mortgage context?

In the context of a mortgage, "prepayment" specifically refers to the act of paying off a portion or the entire loan balance before the payment is officially due. This includes making payments that reduce the principal amount of the loan ahead of the schedule outlined in the loan agreement.

When a borrower pays off the loan partially or fully before the due date, it can often lead to savings on interest payments, as interest is typically calculated on the outstanding principal. Prepayment can have implications for both the borrower and the lender, including potential prepayment penalties in some loan agreements.

While adding extra payments to the principal or making higher-than-scheduled payments may also impact the loan balance, these actions can be considered methods of prepayment. However, it is the act of specifically paying off a portion or the entirety of the balance before the due date that defines prepayment most accurately. Refinancing, meanwhile, involves taking out a new loan to pay off the existing one, which is a distinct process separate from the concept of prepayment itself.