A prepayment charge set as a percentage of the amount prepaid that drops on a fixed schedule, usually each year, until it reaches zero.
A step-down is the simplest prepayment charge to read. The note lists a percentage for each year, the percentages fall, and the cost on any date is that year’s percentage times the amount prepaid. Unlike yield maintenance, it does not move with interest rates, so you can know the cost of an early sale on the day you close.
One published schedule is SBA’s. On a 7(a) loan with a maturity of 15 years or more, voluntary prepayments above 25 percent of the balance in any of the first three years carry a fee to SBA of 5 percent of the amount prepaid in year one, 3 percent in year two and 1 percent in year three, then nothing. Paying off a $600,000 balance in year one would cost $30,000; waiting until year four would cost nothing.
Banks and credit unions write their own schedules, and length and percentages vary by lender and by how long the rate is fixed. Fannie Mae also offers graduated and declining schedules on some loans in place of yield maintenance.
When comparing quotes, line up the schedule against how long you expect to hold the property.
How it shows up in the data here
Not shown on this site. Prepayment schedules are in the note, not in call reports, credit union filings, HMDA rows or SBA loan records. A bank or credit union that keeps a loan on its own books writes its own prepayment terms, so build a list of lenders with search or loan comps and ask each for its schedule along with its rate.
Go further
- Search lenders: Filter banks, credit unions and non-bank lenders by what they hold and made.
- Loan comps: Who made loans like yours, with the median reported rate and term.
- How to place a commercial loan with a bank: A bank loan moves through the same stages every time. Knowing them tells you what the bank needs at each point, what its answer means, and where time is lost.
- SBA 7(a) or 504: which fits your loan: Both are SBA loans, and they work differently. The choice usually turns on what you are buying and how much cash you can put in.
Related terms
- Prepayment penalty: A charge a loan agreement sets for paying off some or all of the principal before a stated date. Common forms are a step-down schedule, yield maintenance and defeasance.
- Yield maintenance: A prepayment charge sized so the lender or investor earns about what it would have earned had the loan run to the end of the yield maintenance period.
- Defeasance: A way to free a property from a loan before maturity by swapping the collateral: the borrower pledges securities that make the remaining payments, and the lien on the property is released.
- Portfolio lender: A portfolio lender is a lender that keeps the loans it makes on its own books instead of selling them to an investor.
- Fixed rate loan: A loan whose interest rate is set at closing and does not change for a stated period, often the whole term, so the principal and interest payment stays the same.
- Term sheet: A term sheet is a short written outline of the loan a lender is prepared to consider: amount, rate, term, fees and main conditions. It is usually not binding.
Sources
- 13 CFR 120.223, Subsidy recoupment fee payable to SBA by Borrower, retrieved .
- Fannie Mae Multifamily Guide, Part V, Chapter 2, Section 213.04, Fixed Rate Mortgage Loans with Graduated Prepayment Premiums, retrieved .
- Fannie Mae Multifamily Guide, Part III, Chapter 11, Section 1104, Prepayment Terms (declining schedule), retrieved .
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.