prepay

verb pre·pay \ (ˌ)prē-ˈpā \
Updated on: 15 Nov 2017

Definition of prepay

prepaid play \(ˌ)prē-ˈpād\; prepaying
transitive verb
:to pay or pay the charge on in advance

prepayment

play \(ˌ)prē-ˈpā-mənt\ noun

Examples of prepay in a Sentence

  1. Special orders must be prepaid.

Recent Examples of prepay from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'prepay.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of prepay

1839


Financial Definition of PREPAY

prepayment

What It Is

Prepayment occurs when a borrower pays off a loan earlier than expected.

How It Works

For example, let's say that John Doe borrows $300,000 to buy a house in Phoenix. The loan is a 30-year mortgage at 5% interest. John lives in the house for five years and makes his payments on time every month. However, in year six, he gets a job offer in Philadelphia and decides to move there. Accordingly, he sells his house. At the closing, the buyer gives John $500,000 for his house. John uses $250,000 to pay off the remaining balance on the loan instead of making 25 more years of payments. John has prepaid the loan.

Why It Matters

When a borrower prepays a loan, the borrower saves a lot of interest. But that means the lender also misses out on all that interest. Accordingly, prepayment can sometimes come with a penalty, and this is disclosed in the loan documents.

People who invest in pass-through securities are also frequently concerned about prepayment. That's because those securities that receive payments from an intermediary that collects payments from a pool of assets. The most famous of these is mortgage-backed securities (MBS), which represent an interest in a pool of mortgage loans.

When people move, as we’ve seen, they sell their houses, payoff their mortgages with the proceeds, and buy new houses with new mortgages. When interest rates fall, many homeowners refinance their mortgages, meaning they obtain new, lower-rate mortgages and pay off their higher-rate mortgages with the proceeds. This means the lenders and the MBS investors miss out on interest income due to prepayment.


PREPAY Defined for English Language Learners

prepay

verb

Definition of prepay for English Language Learners

  • : to pay for (something) before you receive or use it

  • : to pay (something) before you are required to pay it


PREPAY Defined for Kids

prepay

verb pre·pay \ ˈprē-ˈpā \

Definition of prepay for Students

prepaid \-ˈpād\; prepaying
:to pay or pay for beforehand
  • prepay the bill

Law Dictionary

prepay

transitive verb pre·pay \ prē-ˈpā \

legal Definition of prepay

prepaid; prepaying
:to pay or pay the charge on in advance (as of date due or maturity date)
  • no penalty for prepaying your student loan

prepayment

noun


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