Definition of Step Down Prepayment Penalty

What is a Step Down Prepayment Penalty?

A prepayment penalty structure where the borrower pays a declining specific percentage of the loan amount depending on the time of prepayment. For example: a 5 year fixed rate mortgage with a 5/4/3/2/1 step down prepayment penalty structure would have a penalty of 5% in the first year, 4% in the second year, 3% in the third year and so on.