QUESTION: We recently sold our house and found to our dismay that our mortgage lender was hitting us with a steep prepayment penalty. We tried to negotiate this penalty down, but without success. What is a prepayment penalty, and are there any restrictions on the amount of the prepayment?

ANSWER: Your promissory note controls the answer, and the consumer protection laws in this area may not help you. When a mortgage lender makes you a loan for a period of years, say 20 or 30, the lender has the contractual right to have the money earning the agreed-upon interest for the entire period of the loan.

Historically, unless there is an agreement providing for a prepayment -- with or without a penalty -- the borrower (mortgagor) has no right at all to prepay the loan prior to the termination of the term.

In most modern mortgage instruments, usually called deeds of trust, there is language permitting the borrower to prepay the mortgaged debt. This is known as a prepayment privilege. All savings and loan associations covered under federal law must specifically state the penalty, or you are entitled to prepay without penalty.

You must look carefully at the mortgage documents to determine your rights. For example, your lender may permit you to prepay the note in whole or in part without any penalty at all. On the other hand, many lenders want some form of a penalty, usually a percentage of the amount prepaid.

In Maryland, for example, if you are paying on a loan of more than 8 percent interest, there can be no prepayment penalty.

In the District of Columbia, the law permits the lender to charge a prepayment penalty on all loans over 8 percent for a maximum of three years. The penalty, together with the interest rate on your mortgage, cannot exceed 10 percent simple annual interest.

In Virginia, prepayment penalties of up to 2 percent may be charged if the loan is secured by a home occupied by the borrower, unless the loan is less then $75,000, in which case the maximum penalty is 1 percent.

Because the new mortgages being offered by lenders, such as adjustable-rate mortgages, are short-term, any savings and loan association offering such mortgages must permit the borrower to prepay the loan in full or in part without penalty at any time during the loan term.