DSCR Loan Prepayment Penalties: Structures and Negotiation

A 5-4-3-2-1 prepayment penalty means: if you pay off the loan in year 1, you pay 5% of the remaining loan balance as a penalty; year 2, 4%; year 3, 3%; year 4, 2%; year 5, 1%; year 6+, no penalty. Example: you finance $400,000 at 7% and prepay after 18 months (year 2). Remaining balance is about $393,800. You owe a 4% penalty = about $15,750 out of pocket to pay off early. A 3-2-1 structure has lower penalties (2% in year 2, about $7,900 in this example) but only protects the lender for 3 years instead of 5. At LYNK Mortgage, you choose the prepayment term, including no prepayment penalty, which is typically priced at a higher rate. Vacant-property refinances need at least a 1-year prepayment term, and prepayment penalties aren't permitted at all on loans in DC or Kansas.

DSCR lenders price loans around a long, predictable stream of interest over the full 30-year term. When you refinance early, you prepay the principal and that interest income stops. The prepayment penalty compensates the lender for lost interest. It's the market mechanism that enables lenders to fund loans faster and at better rates than they could otherwise. Without prepayment penalties, lenders would need higher initial yields, which is why a loan with no prepayment penalty is typically priced at a higher rate.

Choose the term at origination: with LYNK Mortgage, you pick the prepayment term, including no prepayment penalty in exchange for a higher rate (vacant-property refinances need at least a 1-year term). Wait it out: if your plan is to hold the property for 5+ years anyway, the penalty matters less. Plan refinancing around penalty dates: if you need to refinance, time it after year 3 or 5 when penalties are lower. Match the penalty to your hold period: if you may sell or refinance within a few years, a shorter structure such as 3-2-1 costs less to exit than 5-4-3-2-1.