DSCR Prepayment Penalties
In the world of investment loans, "pre-pays" are standard. Understanding how they affect your exit strategy is the difference between a good deal and a costly mistake.
The Short Answer
A prepayment penalty (PPP) is a fee charged if you pay off your loan early (usually by selling or refinancing). In DSCR lending, PPPs allow the lender to offer you a lower interest rate.
The Real Problem
The "Flip" trap. If you plan to renovate and sell a property in 12 months, but you sign a 5-year prepayment penalty, you could owe $20,000+ at the closing table. Always match your PPP to your hold time.
Common PPP Structures
The "5-4-3-2-1"
5% fee in year one, 4% in year two, and so on. Best for long-term "Buy and Hold" investors who want the lowest possible rate.
The "3-2-1"
A shorter 3-year penalty. Offers a balance between a decent rate and a faster exit window.
The PPP Decision Framework
How to choose?
- Hold period 1-2 years: Buy down the penalty to "0" or "1 year." It will cost more in rate/points, but saves you thousands at exit.
- Hold period 5-10+ years: Take the 5-year penalty. You get the lowest rate, and the penalty will expire long before you sell.
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380 Red Lion Rd, Suite 209
Huntingdon Valley, PA 19006
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380 Red Lion Rd, Suite 209 · Huntingdon Valley, PA 19006