Most investors focus on the rate and skim past the prepayment penalty. Then they sell or refinance sooner than planned, and the penalty turns out to be the most expensive term in the loan.
It does not have to work that way. A prepayment penalty is one of the few terms on a DSCR loan you can actively shape, and once you understand how the structures work, you can match one to your plan instead of inheriting whatever shows up on the term sheet.
A prepayment penalty is a fee for paying off the loan early, within a set window at the start of the term. Pay it off inside that window, whether by selling, refinancing, or writing a check, and you owe the penalty. Let the window pass, and you can pay it off with no fee.
They are common on DSCR loans for a straightforward reason. A DSCR loan is priced on the assumption that it stays on the books for years. When it gets paid off early, that assumption breaks, so the penalty compensates the lender for the shortened term. Once you see it that way, the tradeoff behind it becomes clear.
The penalty starts higher and drops by one percentage point each year until it reaches zero. This is the most common structure on long-term DSCR loans.
Example: a 5-4-3-2-1 step-down charges 5% if you pay off in year one, 4% in year two, and so on down to 1% in year five, then nothing after.
A single penalty rate applies for a set number of years, then drops to zero all at once. Simpler to reason about, and often chosen when an investor wants a shorter penalty window.
Example: a 3-year fixed prepay charges 3% of the balance any time you pay off within the first three years, then nothing after year three.
The penalty is usually calculated as a percentage of the outstanding balance at the time you pay off, though some are figured on the amount prepaid. That detail is worth confirming, because it changes the number.
Tell us how long you plan to hold the property and we'll show you the rate tradeoff on each option.
Here is the part that makes the prepayment penalty a lever rather than a fee. A longer or steeper prepay usually buys you a lower rate, because the lender is more confident the loan will stay on the books. A shorter or softer prepay usually costs a slightly higher rate, because you are buying flexibility.
That means there is no universally correct choice. The right prepay depends entirely on how long you actually plan to hold the loan.
One more thing to check before you sign: whether a sale triggers the penalty at all. Some loans waive it on a true sale and only charge it on a refinance. If your plan is to sell, that single detail can be worth more than a quarter point on the rate.
How We Handle It
The prepay is built around your plan, and the terms hold.
We structure the prepayment penalty to the exit you actually have in mind, and we lay out the rate tradeoff on each option at intake so you can weigh it before you commit. The terms quoted at the start are the terms you close on. If your plan changes mid-hold, tell us early, because there are often ways to work with it.
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