The SBA 504 loan prepayment penalty lasts for 10 years. This is an unusually long time, but it is there to discourage borrowers from paying the loan off too quickly so that the investors who have an interest in the loan can count on continuing the receive the expected income from the loan.
The SBA 504 loan program is a 2 loan structure with a first mortgage from a bank or SBA lender and the second mortgage from a CDC – Certified Development Company. It is an excellent loan for businesses looking for a long term property solution for the their business, because it offers at least 25 year financing, but because of the length of the prepayment penalty business owners need to understand their options.
The 7a loan is also available with a 25 year term and amortization and only has a 3 year prepayment penalty.
Whether or not the first mortgage has a prepayment penalty is up to the bank or lender and the circumstances of your particular transaction, but the second mortgage always has a 10 year prepayment penalty…but it is not as bad as it sounds.
Here is how the prepayment penalty is calculated on a typical 20 year loan:
Essentially, a penalty is charged if the 504 loan is prepaid during the first half of the loan (first 10 years). The penalty is equal to 100% of one year’s interest during the first year, declining by 10% per year (to zero) after ten years.
Similarly, the penalty for 10 year loans is equal to 100% the first year, 20% each year thereafter and zero after 5 years.
SBA 504 Prepayment Penalty Calculation
The prepayment penalty for 20 and 25 year SBA 504 loans is typically referred to as a 10-9-8-7-6-5-4-3-2-1 calculation.
The equation for the SBA 504 loan prepayment penalty is:
Penalty = D (I x P), where
D = the remaining principal balance of the 504 loan.
I = the interest rate stated on the face of the Bond expressed in decimal points (Important: this is the debenture rate – not the effective/note rate).
P = the factor set forth below for the applicable year
Year P
1 = 1.00
2 = .90
3 = .80
4 = .70
5 = .60
6 = .50
7 = .40
8 = .30
9 = .20
10 = .10
11 and thereafter 0
There is no prepayment penalty for 20 or 25 year loans after the 10th year.
Please contact us at 1-800-414-5285 to find out more.
More info about 504 Loans: CDC 504 Program