DSCR Prepayment Penalties: What Paying Off Early Can Cost

Many DSCR loans include a prepayment penalty: a fee if you pay the loan off, or pay down a large part of it, within the first few years. It usually applies when you sell or refinance early. With many lenders, the penalty can be shortened or removed in exchange for a higher rate, so pick the structure that matches how long you plan to hold.

Why lenders charge them

Long-term rental loans are priced on the expectation that the loan stays in place for a while. Investors and lenders who buy or fund these loans count on that interest. A prepayment penalty protects that expected return if the loan is paid off early. It also tends to let lenders offer a lower rate than a loan with no penalty.

Common structures

• Step-down. The penalty shrinks each year. A three-year step-down might charge 3% of the balance in year one, 2% in year two and 1% in year three, then nothing. Five-year versions are also common.
• Flat. One percentage for a fixed period, then it ends.
• Yield maintenance. A formula meant to make the lender whole for interest it would have earned. This can be expensive, especially when rates have fallen.
• None. Available on some programs, usually at a higher rate.

At RSC Private Lending, prepayment terms depend on the program. The DSCR Rental program offers prepayment options from a 5-year step-down to no prepayment penalty. RSC's 12-month Bridge loans have no prepayment penalty.

What triggers the fee

Typically a sale, a refinance or paying the balance off with cash. Many loans also allow a limited amount of extra principal each year without a penalty, but the rules depend on your note. Read the prepayment section before you sign. Some states also limit prepayment penalties on certain loans, so terms can vary by location.

Do the math

Example (illustrative only): On a $350,000 balance:

• 3% penalty: $10,500
• 2% penalty: $7,000
• 1% penalty: $3,500

Now compare that with the rate difference. If skipping the penalty costs an extra $150 a month in interest, that is $1,800 a year. If you are likely to refinance in 18 months, paying the higher rate may be cheaper. On a seven-year hold, the penalty may never come into play.

Match the penalty to your plan

• Long-term hold: a standard step-down is often fine and may get you a lower rate.
• Planning to refinance when rates drop: a shorter penalty, or none, keeps you flexible.
• Might sell within a couple of years: price out a no-penalty option.
• Not sure: choose the shortest penalty you can live with.

What this means for you

The prepayment penalty is part of the price of the loan, just like the rate. Decide how long you expect to keep the loan, then compare total cost under each structure.

Want to see which prepayment option fits your hold plan? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.