Prepayment Penalties

In today’s financial market funding is difficult to obtain, so the reflex of most commercial real estate loan applicants is to jump at the first loan offer they receive.

While we understand such reactions to a loan offer, it is advisable, however,  to scrutinize all loan offers.   Most borrowers will consider the annual interest rate and term of the loan, but they often ignore a critical component of the loan offer– prepayment penalties.

Whether you are seeking a commercial hard money or conventional loan, pay close attention to the prepayment penalty terms, if any in the loan offer.

Most commercial real estate hard money loans do not have a prepayment penalty, but beware of those that do have a prepayment penalty.   If your hard money lender has a prepayment penalty we advise you to keep shopping for a more reasonable lender.   Hard money is already an expensive financing alternative, don’t add to it with a prepayment penalty on top of the steep origination points and other fees.

Prepayment penalties are more common with conventional loans. Prepayment penalties can be as much as 10% of the outstanding balance, to as little as 1% of the outstanding balance of the loan.  

There are variations of how the prepayment penalty is structured, but one of the most common structures is a: 5, 4, 3, 2, 1 prepayment penalty.   What this means is that if there are five years remaining on the prepayment period you would have to pay 5% of the outstanding balance; or, if there is 4 years left of the in prepayment period, then you would pay 4% of the outstanding loan balance; and so forth down to 1 year remaining in the prepayment period you would pay 1% of the outstanding loan balance.   After the prepayment period expires, there is no prepaymeent penalty.

You may also elect to buy down the prepayment penalty, with higher interest rate.  Typically, the longer the prepayment period, the lower your annual percentage rate will be on the loan.

Careful consideration and negotiation of the prepayment penalty can save you thousands of dollars on your loan payment.

Spectracom Holdings
“Helping Commercial Real Estate Owners and Investors Obtain Their Financing Objectives”
Tel: 877-660-2895
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