Quick Answer
Prepayment penalties on DSCR loans typically range from 5-3-2-1% (declining over 4 years) to 3-2-1% (declining over 3 years), costing $5,000-$15,000 on a $300,000 refinance in year 1. Break-even analysis compares penalty cost vs. rate savings: if refinancing saves 0.75% annually ($2,250/year on $300K), a 3% penalty ($9,000) breaks even in 4 years. Time your refinance to minimize or avoid penalties.
Key Takeaways
- Typical prepayment penalty structures: 5-3-2-1% (4-year), 3-2-1% (3-year), or 2-1% (2-year)
- Year 1 penalty cost: $9,000-$15,000 on $300,000 loan (3-5% penalty)
- Break-even formula: Penalty ÷ Annual Rate Savings = Years to Break-Even
- Refinance timing: Wait until penalty declines to 1-2% or expires entirely
- Negotiate penalty terms upfront: Some lenders offer 0-1% penalty for 0.125-0.25% rate premium
FAQ
Q: What types of prepayment penalties exist? A: Step-down (declining annually), yield maintenance, and defeasance. Step-down is most common for DSCR loans.
Q: When should I refinance despite a prepay penalty? A: If the present value of monthly savings exceeds the penalty cost within your expected hold period, refinancing may still make sense.
Q: Can I negotiate prepayment terms? A: Some lenders offer no prepay for higher rates or reduced step-down schedules. Always ask before locking in terms.
Next Step
Use the DSCR Calculator to model your current versus proposed payment and calculate your true break-even including any prepayment penalties.