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FUNDING

PREPAYMENT PENALTY

Planning for Your Prepayment Penalty

UNDERSTANDING THE TYPES OF PREPAYMENT PENALTIES WILL HELP YOU DEVISE A STRATEGY FOR SELLING YOUR PROPERTY.

by Eric Stewart

In recent years, lenders have seen record volumes of long-

It’s important to keep in mind that the lender enters into that agree- ment with the opposite benefit, so they hedge their risk with time. What does that mean? If the lender is going to honor the specified rate for an extended period, they need to receive a min- imum return on their investment.

They accomplish this minimum yield (return) by imposing a penalty if the borrower pays off the loan before a certain date. This date is typically referred to as the “open period.” Although these long-term fixed rate loans are very attractive, the pre- payment penalties can be extremely expensive and dramatically increase

F

term loan requests for commercial property acquisitions. This makes sense as a hedge against rising interest rates. That hedge provides certainty that your interest rate will remain the same for a set period, no matter what market rates do.

22 | think realty magazine :: march – april 2022

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