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.
