• Mortgage redemption penalties often try to keep borrowers from abandoning their lenders.farm house image by Brett Bouwer from Fotolia.com
  
  Many lenders provide borrowers with special deals that are under the market value of the property. These deals draw customers into the program and earn lenders money in the long term through interest payments. However, if the customer pays off the mortgage early, the lender does not earn back the loss in profit that would have been gained through the interest payments. To cover these losses, customers are given mortgage redemption penalties that pay off the losses incurred by the paid-off mortgage.
  
  

Discounted Loans

• Redemption penalties are usually detailed in the contract. If the borrower pays back the loan before the agreed-upon time frame, the borrower usually has to pay specific fees to the lender, according to Secured Loans Comparison. Borrowers who wish to avoid the redemption penalty can take out mortgages that are not discounted, which allows them to pay off the mortgage as early as they'd like. In this case, the bank does not lose money, even if the entire house is paid off early on, because the bank gets at least the market value of the property.
  
  

Tie-Ins

• Some redemption penalties are designed to keep borrowers from leaving the lender. These mortgage redemption penalties are high enough to where most borrowers would continue paying off the loan rather than move to another lender or pay off the mortgage in full, according to the Mortgage Sorter. The fee is only considered a penalty if the borrower has to pay more money than the financial loss incurred by the lender. If the fee only pays to make up the difference for the financial loss incurred by the lender, the borrower is simply paying for the breach of the contract. Although penalizing for a greater amount than the bank loss is not illegal, it is often considered unethical.
  
  

Extended Redemption Penalties

• Most mortgage redemption penalties last for the period of the discounted deal. After the discounted deal portion of the loan has been paid off, the borrower can find a different lender or pay off the mortgage in full, according to the Mortgage Sorter. However, there are some lenders who have extended redemption penalties, which are also called extended tie-ins. These extended penalties can last for several years and must be listed in the contract. Customers who wish to avoid them should read the contract terms carefully and avoid entering into contracts that have extended tie-ins. Once locked into such a contract, the borrower has little recourse to exit the contract.