Prepayment penalty calculator: what it costs to sell early
Pick the penalty structure and the year you expect to sell or refinance. You get the penalty in dollars, the year-by-year schedule, and whether the lower rate that came with it pays for it.
Penalty bites 3% in year 3
Penalty if you pay off in year 3
$8,719
Paying off $290,620 in year 3 costs 3% of it: $8,719. The 7.25% rate saves $4,527 of interest over 36 months against 7.75% with no penalty, so the penalty loan comes out $4,192 behind.
- Schedule
- 5-4-3-2-1
- Penalty rate that year
- 3%
- Balance paid off
- $290,620
- Interest paid by then
- $64,295
- Same, at the no-penalty rate
- $68,822
- Penalty loan ahead (behind)
- -$4,192
| Year | Rate | Balance | Penalty |
|---|---|---|---|
| 1 | 5% | $297,096 | $14,855 |
| 2 | 4% | $293,975 | $11,759 |
| 3 (yours) | 3% | $290,620 | $8,719 |
| 4 | 2% | $287,013 | $5,740 |
| 5 | 1% | $283,136 | $2,831 |
| 6 | 0% | $278,969 | $0 |
Penalty = the year's percentage times the balance you pay off. Some states limit or bar prepayment penalties on certain loans, and lenders' terms differ, so ask how yours is written before you sign. Pricing and penalty terms on this program are quoted per loan.
The method
- Balance at the end of each loan year comes from the standard amortization formula at the rate with the penalty. On interest-only payments it stays at the full loan amount.
- Penalty = that year's percentage × the balance paid off. Payoff is taken at the end of the year you pick, the last month its percentage applies.
- Rate comparison: interest paid through payoff on each loan. The penalty loan's total is its interest plus the penalty; the no-penalty loan's total is its interest. Principal is left out because you repay it either way.
The stamp reads "Free to exit" when there is no penalty in your year, "Rate covers it" when the interest you save beats the penalty, and "Penalty bites" when it does not.
Why the step-down matters more than the headline
A 5-4-3-2-1 penalty sounds harsh and a 3-2-1 sounds mild, but if you plan to hold more than five years, neither costs you a dollar. If you might sell in year 2, the 5-year schedule charges 4% and the 3-year one charges 2%. Decide on the exit first, then on the penalty. Program terms are on the DSCR loans and portfolio loans pages. To see how much loan the rent supports, use the DSCR calculator, then send us the deal.
Questions people ask
How does a 5-4-3-2-1 prepayment penalty work?
You pay 5% of the balance if you pay the loan off in year 1, 4% in year 2, and so on down to 1% in year 5, then nothing. On a $300,000 loan at 7.25% amortized over 30 years, the balance at the end of year 3 is $290,620, so selling then costs 3% × $290,620 = $8,719.
Is a lower rate worth taking a prepayment penalty?
Only if you keep the loan long enough. Against a 7.75% loan with no penalty, the 7.25% loan saves $4,527 of interest in 3 years, not enough to cover the $8,719 penalty, so it comes out $4,192 behind. Hold it 5 years and the savings reach $7,569 against a $2,831 penalty: $4,738 ahead. Put your own two quotes in and pick the year you really expect to sell.
Does a refinance trigger the penalty?
Usually yes. The penalty is for paying the loan off early, and a refinance pays it off just as a sale does. Some notes also charge on large partial paydowns, so read that section of the note too.
Are prepayment penalties legal on investment property loans?
They are a common term on business-purpose rental loans, but some states limit or bar them on certain loans, and the rules change. Ask the lender, or your attorney, how they apply to your property before you sign.
Can I get a DSCR loan with no prepayment penalty?
Often, at a price: a higher rate or more points. On the program here, prepayment terms are quoted per loan, so ask for the same loan quoted two ways and run both through this calculator.
Numbers look right?
Send the deal. We check it against the lender's terms and come back with a loan.