Do DSCR loans have prepayment penalties?
Yes, most DSCR loans carry a prepayment penalty, typically three to five years and structured as a step-down such as 5-4-3-2-1, meaning five percent of the balance in year one and one percent less each year. Choosing no penalty usually raises the rate by a half to one full point.
The common structures
| Structure | Penalty if you pay off in year 1, 2, 3, 4, 5 | Typical rate effect vs no penalty |
|---|---|---|
| 5-4-3-2-1 | 5, 4, 3, 2, 1 percent of balance | Lowest rate, about 0.5 to 1 point below no penalty |
| 3-2-1 | 3, 2, 1 percent, then none | About 0.25 to 0.5 point below no penalty |
| 3-3-3 | 3 percent for three years | Similar to 3-2-1 |
| 1-year | 1 to 2 percent in year one | Small rate benefit |
| None | 0 | Highest rate |
Some lenders also offer a minimum interest structure, where you owe a set number of months of interest if you pay off early. States regulate penalties differently, and a few restrict them on residential property even for investors, so the menu depends on where the property sits.
What it costs in practice
On a $400,000 balance with a 5-4-3-2-1 penalty, a sale in year two costs $16,000. A refinance in year four costs $8,000. Compare that to the rate savings: a one-point lower rate saves about $3,000 a year on the same loan, so over a five-year hold the penalty structure saves $15,000 in interest and costs nothing if you never pay early.
Choosing the right one
Long-term hold. Take the five-year step-down. You keep the lower rate and never pay the penalty.
Likely sale or refinance in two to three years. Take a 3-2-1 or buy the penalty out. The higher rate is cheaper than the penalty.
Uncertain. A 3-2-1 is the usual compromise.
Exceptions to watch for
- Partial prepayments. Many lenders allow paying down 20 percent of the balance per year without penalty. Ask.
- Sale vs refinance. Some penalties apply only to refinances, not sales. Read the note.
- Assumption. A few DSCR loans are assumable by a qualified buyer, which avoids the penalty on sale.
- Rate-and-term refinance with the same lender. Occasionally waived.
Refinancing out of a penalty
If rates drop, run the math: the penalty plus new closing costs against the monthly savings. A $12,000 penalty and $6,000 in costs against $400 a month of savings is a 45-month payback, which is usually not worth it unless you are also pulling cash out for a new purchase.
How CommFi handles it
Our lending desk quotes the penalty options side by side with the rate for each, so you can choose by hold period rather than guess. When a lender with a more flexible penalty menu fits better, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- Can I get a DSCR loan with no prepayment penalty?
- Yes. Expect the rate to be a half to one point higher than the same loan with a five-year step-down penalty.
- How is a DSCR prepayment penalty calculated?
- As a percentage of the outstanding balance at payoff, stepping down each year, or as a set number of months of interest.
- Does the penalty apply if I sell the property?
- Usually, yes. Some lenders apply it only to refinances. Check the note before you sign.
- Can I pay extra on the principal without a penalty?
- Many lenders allow up to 20 percent of the balance per year without triggering the penalty.
- Are DSCR prepayment penalties legal in every state?
- No. Several states restrict penalties on residential property, which is why the options differ by location.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.