Why Prepay Penalties Matter
When you take out a DSCR loan, most lenders include a prepayment penalty. This is a fee charged if you pay off the loan early — either by selling the property or refinancing before the penalty period expires.
Most investors focus on the rate and don't read the prepay terms carefully. Then 18 months later, rates drop or a better deal comes along — and they're stuck, or they pay thousands in penalties they didn't plan for.
The rate you get today is only part of the cost.
The prepay structure determines what it costs to change course.
The prepay structure determines what it costs to change course.
Types of Prepayment Penalties
Know exactly what you're agreeing to before you sign
5% Fixed Prepay
Flat Penalty — Full Term
With a 5% fixed prepayment penalty, you owe 5% of the outstanding loan balance any time you pay off the loan early — whether through a sale or a refinance. This penalty stays at 5% for the entire prepay period, typically 3 or 5 years. On a $300,000 loan, that's $15,000 due at payoff regardless of when in the penalty window you exit. It's the most restrictive structure and offers the lender the most protection, which is why it typically comes with the lowest rate. Best suited for investors with a long, confident hold timeline who are unlikely to refi or sell within the penalty period.
6-Month Interest Prepay
Interest-Based Penalty — More Predictable Cost
Instead of a percentage of the loan balance, this penalty is calculated as six months of interest on the outstanding balance. The cost varies depending on your rate and loan amount — but it's generally less severe than a fixed percentage penalty and easier to model in advance. For example, on a $300,000 loan at 8%, six months of interest is approximately $12,000. This structure is common with lenders who want some protection but are willing to offer more flexibility than a hard fixed penalty. It's a middle-ground option that rewards investors who hold longer while keeping the exit cost calculable.
Step-Down Prepay
Penalty Reduces Each Year
The step-down is the most investor-friendly penalty structure because the cost of exiting decreases every year. A common structure is 5/4/3/2/1 — meaning 5% in year one, 4% in year two, 3% in year three, stepping down to zero after year five. Some lenders offer 3/2/1 or 2/1 structures for shorter lock periods. This gives you a clear, predictable exit timeline to plan around. If you know you'll hold for at least three years but want flexibility after that, a step-down often offers the best balance of rate savings and exit optionality. It's the most common prepay structure in the DSCR market.
No Prepay
Full Flexibility — At a Cost
A no-prepay loan lets you sell or refinance at any time without penalty. That flexibility comes at a price — typically 0.25% to 0.75% higher in rate compared to a loan with a step-down penalty. For short-term strategies, value-add plays, or investors who anticipate refinancing within 12-18 months, paying the rate premium for no prepay is often the right call. It's also worth considering if you're unsure about your hold timeline and don't want to risk a penalty locking you into a decision. The math is simple: if you plan to exit before the step-down saves you money, no prepay wins.
How to Choose the Right Structure
Match the penalty period to your hold timeIf you plan to hold for 5+ years, a step-down or fixed prepay saves you rate. If you plan to refi in 12-18 months, pay the premium for no prepay.
Think about your refi timeline before you closeRates change. If there's any chance you'll want to refi within the penalty window, factor that cost in upfront — not after the fact.
Model the actual cost before you chooseA 5% fixed penalty on a $400,000 loan is $20,000. Compare that against the rate savings over your hold period to see which structure actually wins for your scenario.
Different lenders structure penalties differentlyTwo lenders offering the same rate may have very different prepay terms. Comparing lenders means comparing the full package — not just the rate.