DSCR prepayment penalties add 0.35–0.50% to your rate savings — or cost more than they're worth. Worked math for 24-month and 84-month holds, plus a state restriction table.
Comprehensive reference: See our prepayment penalties guide for every PPP structure, state restriction, and buydown formula. This article focuses on hold-period decision math and 2026 rate trade-offs.
The prepayment penalty decision on a DSCR loan reduces to a single question: how confident are you in your hold period? If you know you’ll hold 7+ years, the 5-4-3-2-1 step-down structure produces a lower rate and a higher return. If there’s a real chance you’ll sell or refinance within 3 years, the no-PPP premium may be worth paying. The math is specific, not directional — and most investors make this decision based on intuition when they should be running numbers. This article defines the structures, quantifies the rate trade-off, maps state restrictions, and works through two scenarios to show exactly where the break-even falls.
The 5 Common PPP Structures Defined
Prepayment penalties on non-QM DSCR loans come in five basic forms. Know what each means before signing a note.
5-4-3-2-1 step-down. The most common structure in the non-QM market. You pay a percentage of the outstanding loan balance if you prepay (sell, refinance, or make a large principal payment that triggers the PPP threshold) within the first 5 years. The percentage declines by 1 point each year: 5% in year 1, 4% in year 2, down to 1% in year 5. After year 5, no penalty applies. This structure produces the lowest rate among all options.
3-2-1 step-down. Three-year version of the step-down. Penalties apply only in years 1–3. After year 3, no penalty. Rate premium versus 5-step is typically 0.12–0.25% — you pay a little more rate for the shorter lockout window.
5/0/0/0/0 hard penalty (year-1 only). A penalty applies only in year 1 — often 5% of balance — and nothing after that. This structure is less common but worth knowing: it’s essentially a prepayment fee for same-year exits, with full flexibility from year 2 forward. Pricing varies; some lenders treat it similarly to a 3-step, others closer to no-PPP.
Declining balance (yield maintenance). Used more commonly in commercial DSCR products than residential non-QM. The penalty is calculated based on the present value of remaining interest payments, not a fixed percentage of balance. Can be more expensive than a step-down in a rising-rate environment; potentially cheaper in a declining-rate environment. Most residential non-QM DSCR borrowers will not encounter this structure.
No prepayment penalty (no-PPP). No penalty for payoff or refinance at any time. The lender prices the incremental default risk and prepayment optionality into a higher interest rate. Current market spread: approximately 0.35–0.50% above the 5-4-3-2-1 benchmark rate (OCMBC and EPM Wholesale pricing, Q2 2026). On a $400,000 loan, that premium costs roughly $1,400–$2,000 per year in additional interest.
The Rate Trade-Off: What No-PPP Actually Costs
The rate differential between 5-step and no-PPP is not a flat number — it varies by lender, loan size, LTV, and FICO. The current market range is 0.35–0.50%. The table below uses the midpoint of that range for illustration.
| PPP Structure | Rate Add vs. 5-Step | Annual Interest Cost on $400K | 5-Year Interest Cost |
|---|---|---|---|
| 5-4-3-2-1 step-down | — | $0 baseline | $0 baseline |
| 3-2-1 step-down | +0.12–0.25% | +$480–$1,000 | +$2,400–$5,000 |
| No-PPP | +0.35–0.50% | +$1,400–$2,000 | +$7,000–$10,000 |
Rate assumptions: 6.37% baseline (5-step, 1.0 DSCR, 75% LTV, 720 FICO). These are illustrative based on the live /rates grid (October 2026; 720/75/1.00–1.24 anchor 6.75%).
The no-PPP premium over 5 years is $7,000–$10,000 in additional interest on a $400,000 loan. That is also the range of the buyout cost in year 2 (4% of $400,000 = $16,000) and year 3 (3% of $400,000 = $12,000). The comparison between paying the premium versus paying the penalty at exit is the heart of the decision.
State PPP Rules — Where the Choice Is Made for You
In some states, the prepayment penalty decision is partly made for you. State law bans PPPs on most investor 1–4 unit loans in a few states and caps their size, term or loan type in others. Several states that are often listed as bans only protect owner-occupied homes.
| State | Scope (investor 1–4 unit) | Rule | Statute |
|---|---|---|---|
| Alaska | Banned | Loans covering 1–4 family dwellings may be prepaid without penalty, except federally insured loans that require one. No occupancy limit. | AS 45.45.010(g) |
| New Jersey | Banned | Loans on 1–6 unit dwellings above 6% interest may be prepaid without penalty. The borrower can be any person other than a corporation, so individuals and LLCs are generally covered. No occupancy test. | N.J.S.A. 46:10B-1, 46:10B-2 |
| New Mexico | Banned | PPP provisions in home loans and obligations secured by a real estate mortgage are unenforceable. No occupancy limit in the text; courts have held it preempted for national banks. | NMSA 1978 §56-8-30 |
| Minnesota | Restricted | On residential mortgage loans at or below the conforming limit: no penalty on partial prepayments or a sale, none after 42 months, capped at the lesser of 2% or 60 days' interest; barred on first-lien loans priced more than 3 points over comparable Treasuries. Applies whether or not the owner occupies. | Minn. Stat. §58.137, subd. 2 |
| Ohio | Restricted | Loans on 1–2 unit property: PPP capped at 1% of the original principal, none after 5 years. 3–4 unit loans fall outside. | Ohio Rev. Code §1343.011 |
| Pennsylvania | Restricted | No PPP on loans on 1–2 unit property at or below the annually adjusted base figure ($329,411 in 2026). No occupancy test; 3–4 unit and larger loans fall outside. | 41 P.S. §101, §405 (Act 6) |
| Rhode Island | Restricted | Loans on 1–4 unit dwellings: at most 2% in year one, none after. On refinances the borrower can agree in writing to a disclosed PPP lasting up to 60 months. | R.I. Gen. Laws §34-23-5 |
| Georgia | Owner-occupied only | Limits apply to high-cost home loans on the borrower's principal dwelling. | O.C.G.A. §7-6A-2, §7-6A-5 |
| Illinois | Owner-occupied only | Bars PPPs on residential loans above 8% APR, but loans to corporations and business loans (including investment) are excluded. | 815 ILCS 205/4(1)(a), (1)(c), (2)(a) |
| Massachusetts | Owner-occupied only | Caps PPPs (none after 36 months) on 1–4 family homes occupied in whole or in part by the borrower. | M.G.L. c.183 §56 |
| New York | Owner-occupied only | No PPP after year one on loans above 6% secured by a 1–6 family residence occupied by the owner. | N.Y. Gen. Oblig. Law §5-501(3)(b) |
| Texas | Owner-occupied only | Bars a PPP only on a homestead loan with a rate above 12%. | Tex. Fin. Code §302.102 |
| Vermont | Owner-occupied only | Bars PPPs generally, but exempts corporations and loans financing income-producing property other than a 1–4 unit dwelling the borrower lives in. | 9 V.S.A. §45, §46 |
Statutes checked October 1, 2026. Not legal advice: confirm the PPP terms with your lender.
Practical implication: If you’re buying in Alaska, New Jersey, or New Mexico, ask your lender how it prices loans there. You generally can’t take a step-down PPP in exchange for a lower rate, so you shouldn’t be paying a 5-step rate without a 5-step option. In Minnesota, Ohio, Pennsylvania, and Rhode Island the rule turns on loan size, unit count and loan type, so ask which PPP options are legal on your file. Confirm the terms in writing before signing the rate lock.
Borrowers comparing DSCR lenders across state lines (e.g., a Texas investor buying in New Mexico) sometimes don’t realize their quote already reflects the state’s PPP rule. The compare best DSCR lenders tool flags state availability.
The Buy-Out Math — When Paying the Penalty Makes Sense
The buy-out is worth running when rates have dropped significantly since origination or when the property needs to be sold before the PPP window expires. Here is the framework.
Break-even formula:
Monthly interest savings from refi × months remaining until PPP expires = PPP buy-out cost
That decision sits inside our DSCR Calculators & Tools hub, where DSCR Authority maps program fit and what investors usually prep before booking a strategy call.
That decision sits inside our DSCR Loan Guides hub, where DSCR Authority maps program fit and what investors usually prep before booking a strategy call.
If monthly savings exceed the buy-out cost divided by months remaining, you break even before the PPP window closes and refinancing makes sense now rather than waiting.
Example: $400,000 loan, currently in year 3 (1% penalty = $4,000 remaining). Rate today: 7.0%. New rate available: 6.25%. Monthly savings: $400,000 × (7.0% – 6.25%) / 12 = $250/month. Months until PPP expires: 24 (end of year 5). Break-even: $4,000 ÷ $250 = 16 months. Since 16 months < 24 months remaining, refinancing and paying the penalty now makes sense if the new rate holds. Use the refi break-even calculator to run your specific numbers.
Refi planned? We model 5 PPP structures against your timeline.
Tell us your current rate, loan balance, and expected hold period — we'll show which structure produces the best return.
Worked Example 1: $400K Loan, Hold 24 Months
Scenario: Investor purchases a property with a $400,000 DSCR loan. Plans to refinance or sell in approximately 24 months (year 2 of the loan term). Rate environment: 6.37% with 5-step, 6.87% with no-PPP.
| Structure | Rate | Monthly Payment (P&I only) | Year 2 Exit Cost | Total Cost: 24 months payment + exit |
|---|---|---|---|---|
| 5-4-3-2-1 step-down | 6.37% | $2,492 | $16,000 (4% penalty) | $59,816 + $16,000 = $75,816 |
| 3-2-1 step-down | 6.62% | $2,560 | $8,000 (2% penalty) | $61,440 + $8,000 = $69,440 |
| No-PPP | 6.87% | $2,630 | $0 | $63,120 |
At 24 months, the no-PPP wins. The 5-step structure costs approximately $12,700 more at a 24-month exit than no-PPP, despite starting with the lowest rate. The 3-2-1 step-down is the middle path — a better rate than no-PPP with a smaller exit penalty. For a hold period under 30 months, no-PPP or 3-2-1 is the rational choice on a $400K loan.
Key assumption: the penalty is calculated on the outstanding loan balance at exit, not the original balance. At month 24, the $400,000 balance has amortized slightly — call it $393,000. The 4% penalty is ~$15,720. The math does not change materially.
Worked Example 2: $400K Loan, Hold 84 Months
Scenario: Same loan, same rates. Investor plans to hold 84 months (7 years) — through the entire PPP window and 24 months beyond.
| Structure | Rate | Monthly Payment (P&I only) | Exit Penalty at Month 84 | Total Cost: 84 months payment + exit |
|---|---|---|---|---|
| 5-4-3-2-1 step-down | 6.37% | $2,492 | $0 (PPP expired at month 60) | $209,328 |
| 3-2-1 step-down | 6.62% | $2,560 | $0 (PPP expired at month 36) | $215,040 |
| No-PPP | 6.87% | $2,630 | $0 | $220,920 |
At 84 months, the 5-step wins by $11,592 versus no-PPP. The entire premium paid for the no-PPP flexibility produced $11,592 in unnecessary interest over the hold period — without ever using the prepayment option. The 3-2-1 step-down is again the middle ground: it outperforms the 5-step at exits before month 36, and outperforms no-PPP at exits after month 36.
The crossover points on a $400K loan:
| Comparison | Crossover Point |
|---|---|
| 5-step vs. no-PPP | ~Month 40–45 |
| 3-step vs. no-PPP | ~Month 28–32 |
| 5-step vs. 3-step | At exit in year 3 or later, 5-step wins |
These crossovers shift with rate differentials. Use the prepayment penalty analyzer to model your specific loan amount, rate differential, and hold period.
Decision Tree by Hold Period
The matrix below is a starting framework. Adjust based on your actual rate quotes, which may vary from the 0.35–0.50% spread assumed here.
| Expected Hold Period | Recommended PPP Structure | Reasoning |
|---|---|---|
| Under 24 months | No-PPP | Penalty outweighs rate savings at any plausible rate differential |
| 24–36 months | No-PPP or 3-2-1 | No-PPP cleaner; 3-2-1 if rate differential exceeds 0.25% |
| 36–48 months | 3-2-1 or 5-step | Run the math; crossover varies by rate differential |
| 48–60 months | 5-4-3-2-1 | Rate savings likely exceed no-PPP premium; full window used |
| 60+ months | 5-4-3-2-1 | Strongest rate savings; no exit cost after year 5 |
| Uncertain / flexible | 3-2-1 | Compromise structure with manageable rate premium |
One variable that changes the answer: if you’re in a state with PPP restrictions, the decision is removed. Price accordingly.
A second variable: loan size. The rate differential is linear — on a $150,000 loan, the annual no-PPP premium is $525–$750, and the year-2 penalty on a 5-step is $6,000. The crossover on a small loan shifts earlier, making no-PPP more attractive relative to the 5-step even at shorter holds.
We’ll model 5 PPP structures against your expected hold period and show you which one maximizes return at your specific loan amount. Get matched and we’ll have the comparison in front of you before you lock a rate.