# DSCR Prepayment Penalties: How Step-Downs Work | KREC

*How DSCR prepayment penalties work, what a 5-4-3-2-1 step-down costs in dollars, and how to match the penalty to your plan to sell or refinance.*

## DSCR Prepayment Penalties: Step-Downs, Buyouts and When They Matter

Most DSCR loans carry a prepayment penalty. It's rarely a problem if it matches your plan, and expensive if it doesn't. Here's how to read one.

Short answer

A prepayment penalty is a fee for paying off the loan early, usually a percentage of the balance that steps down each year. A common structure is 5-4-3-2-1: 5% in year one, falling to nothing after year five. Shorter penalties, or none, are often available in exchange for a higher rate.

Key points

- Common structures step down over three to five years.
- A shorter penalty usually costs a higher rate.
- Match the penalty to how long you'll hold.

### How a step-down works

The penalty is a percentage of the balance you pay off, and it shrinks each year. Sell or refinance in year two of a 5-4-3-2-1 structure and you pay 4%; wait until year six and you pay nothing.

**Deal sheet: 5-4-3-2-1 penalty on a $300,000 payoff, illustrative**

|  | Penalty | Cost |
| --- | --- | --- |
| Year 1 | 5% | $15,000 |
| Year 2 | 4% | $12,000 |
| Year 3 | 3% | $9,000 |
| Year 4 | 2% | $6,000 |
| Year 5 | 1% | $3,000 |
| **After year 5** | **0%** | **$0** |

### Common structures

- **5-4-3-2-1:** five years, stepping down 1% a year.
- **3-2-1:** three years, a common middle ground.
- **No penalty:** available on some programs, usually at a higher rate.

Some loans use a flat percentage or a yield-maintenance formula instead, so read the note before you sign.

> Have a rental in mind? Send the address and expected rent, and a KREC loan advisor will run the DSCR for you. [Check my DSCR](https://keyrealestatecapital.com/contact)

### Matching the penalty to your plan

- **Holding five years or more:** a longer penalty can buy a lower rate you'll actually benefit from.
- **Planning to sell or refinance soon:** a shorter penalty, or none, protects your exit.
- **Waiting for rates to fall:** a long penalty can wipe out the savings; see [what half a point does to your payment](https://keyrealestatecapital.com/blog/half-point-rate-difference).

Many lenders also allow partial paydowns each year without triggering the penalty, so ask.

### Frequently asked questions

#### What is a 5-4-3-2-1 prepayment penalty?

It's a step-down penalty: 5% of the payoff balance in year one, 4% in year two and so on, reaching zero after year five.

#### Can I get a DSCR loan with no prepayment penalty?

Often, yes, but expect a higher rate. Whether it's worth it depends on how soon you might sell or refinance.

#### Does a prepayment penalty apply if I sell?

Usually. Selling pays off the loan, so the penalty applies unless the loan has passed its penalty period.

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## Article Metadata
- **Headline:** DSCR Prepayment Penalties: Step-Downs, Buyouts and When They Matter
- **Published:** 2026-10-27
- **Author:** Key Real Estate Capital

## Frequently Asked Questions

### What is a 5-4-3-2-1 prepayment penalty?

It's a step-down penalty: 5% of the payoff balance in year one, 4% in year two and so on, reaching zero after year five.

### Can I get a DSCR loan with no prepayment penalty?

Often, yes, but expect a higher rate. Whether it's worth it depends on how soon you might sell or refinance.

### Does a prepayment penalty apply if I sell?

Usually. Selling pays off the loan, so the penalty applies unless the loan has passed its penalty period.

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