Investors negotiate rate and points on DSCR loans. They routinely overlook the prepayment penalty structure - until they try to sell or refinance and discover they owe $30,000 in penalties they didn't model. Don't be that investor.
Types of Prepayment Penalties
Step-down prepay: The most common structure. A percentage penalty that decreases over time - e.g., 5-4-3-2-1 means 5% penalty in year 1, 4% in year 2, down to 0% after year 5. Yield maintenance: You pay the lender the interest they expected to earn over the term of the loan. Most expensive structure. Defeasance: You substitute government securities for the loan. Complex and expensive - rare on non-institutional products. No prepay: Available on some products at a higher rate.
How to Model Prepayment Cost
On a $400K DSCR loan with a 5-year step-down, selling in year 2 costs you 4% × $400K = $16,000. Selling in year 3 costs $12,000. These numbers need to be in your hold-period analysis before you originate the loan. If your strategy is buy-and-flip in 18 months, don't take a 5/4/3/2/1 step-down - get a no-prepay product even if the rate is 0.25% higher.
When Max Prepay Makes Sense
If you're buying a DSCR loan at the absolute base rate (like Adler Capital's 6.375% floor for multifamily), that rate comes with maximum prepayment terms. If your hold strategy is 7-10 years minimum, max prepay doesn't cost you anything. You're being compensated with the lowest rate available in exchange for the lender's certainty of yield.
Always ask: 'What's the prepayment structure?' on every loan you originate. Write it in your hold period model before you close.
