DSCR Loan Prepayment Penalty Structures, Decoded
A prepayment penalty is a fee charged for paying off a DSCR loan early — through a sale, refinance, or large principal paydown — inside a defined penalty period. The three common structures are step-down, flat percentage, and yield maintenance, each calculated differently.
NightYield Editorial
STR-DSCR research & underwriting desk
Published 2026-07-20
Why DSCR loans commonly carry this feature at all
Prepayment penalties exist because DSCR loans are frequently sold to investors expecting a certain stream of interest payments over a defined period. Paying the loan off early disrupts that expected return, and the penalty compensates for it. Investors sometimes have the option to choose a shorter penalty period, or none at all, typically in exchange for a rate adjustment.
This is a structural, disclosed feature of the loan agreed to at origination — not a surprise fee — but it needs to be understood before choosing a structure, especially for a BRRRR strategy that plans an early refinance.
The three common structures, decoded
| Structure | How it's calculated | Typical pattern |
|---|---|---|
| Step-down (e.g. 5-4-3-2-1) | A declining percentage of the remaining balance for each year of the penalty period | Highest penalty in year 1, decreasing each year, reaching zero after the period ends |
| Flat percentage | A fixed percentage of the loan balance regardless of which year in the period | Same percentage whether paid off in year 1 or year 3 |
| Yield maintenance | Calculated to make the lender economically whole for the lost interest income over the remaining term | Can be the most expensive structure if paid off very early in the term |
Choosing a structure that matches your actual plan
A long-term buy-and-hold investor with no near-term refinance plan may not weigh the penalty structure heavily at all, since they don't expect to trigger it. A BRRRR investor planning to refinance out within 12–24 months should treat the penalty structure as a real cost of the strategy, not a footnote — sometimes it's worth paying a slightly higher rate upfront for a shorter penalty period or none at all.
Key takeaways
- Prepayment penalties compensate the lender/investor for interest income lost when a loan is paid off early.
- Step-down, flat percentage, and yield maintenance are the three common structures, each calculated differently.
- Step-down penalties decline each year of the period; flat penalties stay the same throughout; yield maintenance can be the costliest if paid off very early.
- A planned early refinance (BRRRR) makes the penalty structure a real cost to weigh, not a footnote to skip.