prepayment penalty options - which is better?

Question

Getting ready to buy a multifamily - loan will have a prepayment penalty - bank has offer me two options: 1- declining term option (5%, 4%, 3%, 2%, 1%, 0%). 2- treasury yield (basically it takes the rate you lock in today and IF you want to pre-pay the loan off early it will compare it to the rate that day- if the rate is higher there is no prepayment penalty (as the bank would love for you to pay us off so we can go lend money at a higher rate)- if the rate is lower there is a penalty (and it’s impossible for me to tell you what that penalty would be as there are a lot of variables- time left on the loan, rate that day vs your actual rate etc). Both of these options still let you pre-pay the loan up to 5% a year with NO penalty)

Which would you pick??

Thanks!!

ASHLEY

Which would you pick??

Thanks!!

ASHLEY

Ashley Garner · Answer

The plan is to hold this one for a long, long time.  But either way it seems that the treasury yield option is the way I will go.  Since the rates are so low right now chances are rates would be higher if i ever did sell, which means no penalty.  Other terms fit my needs (10 year fixed, 25 yr Am), so full speed ahead!

Thanks so much for the input!!

ASHLEY

Chris Mason · Answer

I wouldn't take a penalty if someone upfront couldn't explain to me the math behind how the penalty will be calculated, no.

Alexander Felice · Answer

Depends on the exit strategy.

What are the chances you refi in the next 5 years? If chances are low, then maybe use treasury rate and take the gamble, if chances to refi are high, then take the known variable.

The specifics of the overall deal matter. What is the deal size and how cash tight is the deal?

Joe Prillaman · Answer

Never done a deal big enough to have these type options haha. @Alexander Felice what do you think?