Prepayment Penalties on DSCR Loans

A DSCR loan is priced on the assumption you will hold it. Long-term money is funded by investors who want the yield for a stated number of years, so paying it off early breaks the trade they bought. The prepayment penalty is what compensates for that.

This is the single most common surprise on a rental refinance, and it is entirely avoidable if you read the structure before you sign.

Step-down

The most common shape on investor rental loans. The penalty is a percentage of the balance that falls each year you hold. A 5-4-3-2-1 structure charges 5% if you pay off in year one, 4% in year two, and nothing after year five.

The math is easy to run in advance: take your expected payoff year, multiply the rate for that year by the balance, and you have the bill.

Yield maintenance

Less common on single rentals, normal on CRE permanent debt. Instead of a fixed schedule, you pay the lender the present value of the interest they would have earned had you held to term. It is not a percentage you can look up; it moves with rates.

The direction matters. When rates have fallen since you closed, yield maintenance gets more costly, because the lender cannot replace your yield. When rates have risen, it can be close to nothing.

Defeasance

Mostly a securitized-CRE mechanism. Rather than paying the lender, you substitute a portfolio of securities that throws off the same payments. It is administratively heavy and rarely relevant on a single rental.

How to plan around it

• Know your real hold. If you plan to sell in 18 months, a 5-year step-down is the wrong loan, whatever the rate.
• Ask what is exempt. Many structures allow a partial paydown each year, or waive the penalty on a genuine sale rather than a refinance.
• Price it against the alternative. A bridge loan with no penalty may cost more in rate and less in total if the hold is short.

If you are consolidating several rentals rather than refinancing one, the penalty applies per loan being retired, which is often the argument for a portfolio loan instead of individual mortgages.

Structures vary by program and are set in underwriting. This is not a commitment to lend.