How do prepayment penalties work on DSCR loans?

What is a prepayment penalty?

It's a fee you pay if you pay off the loan early, usually by selling or refinancing. It doesn't apply to your normal monthly payments, and many programs let you pay down some extra principal each year without a penalty.

What do the common structures look like?

Structure	How it works
5-4-3-2-1	5% of the balance if paid off in year 1, 4% in year 2, and so on down to 1% in year 5
3-2-1	3%, 2%, then 1% over the first three years
Fixed	The same percentage (for example 3%) for a set number of years
None	No penalty, usually at a higher rate

Prepayment penalties are allowed on investment property loans in most places, but some states limit them. We'll confirm what applies to your property.

How much could it cost me?

On a $300,000 balance, a 3% penalty is $9,000. That's why your plan matters: if you might sell or refinance within two years, a shorter penalty or no penalty may save you money even at a slightly higher rate.

How do I choose?

• Holding 5+ years? A longer penalty for the lower rate often makes sense.
• Might refinance when rates drop? Choose a shorter penalty.
• Planning to sell or flip soon? Look at no-penalty options, or a different loan type altogether.

Our take

I'll put the penalty options next to each other in real dollars: the rate, the monthly payment, and what you'd owe if you sold in year one, two, or three. Then you pick based on your plan, not the lowest advertised rate.