Prepayment Penalty
A fee for paying off a loan early, common on DSCR loans and often structured as a step-down over the first several years (for example 5-4-3-2-1 percent).
A prepayment penalty is a fee a lender charges for paying off a loan early, whether through a sale or a refinance. It is common on DSCR and other investor loans, and it is often structured as a step-down: a 5-4-3-2-1 schedule, for instance, charges 5 percent if you pay off in year one, falling by a point each year until it disappears.
The risk is that it can trap an early exit, making a quick sale or a tempting refinance far more expensive than the headline rate suggests. Factor any penalty into your refinance break-even calculation, and confirm the exact structure, since it varies by lender.
Used in these calculators
Guides that put this term to work
Related terms: DSCR (Debt Service Coverage Ratio)
Last updated . Part of the FinExplained finance glossary .