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SBA 504 Prepayment Penalty - How It Works

The SBA 504 loan program is a 2 loan program with a first mortgage from a bank or SBA lender and the second mortgage from a CDC - Certified Development Company.

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 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 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-year loans after the 10th year.**

## Are You A Banker Looking For Help With Underwriting, Closing or Selling SBA Loans?

If you are a bank or credit union looking to get into SBA lending without hiring a staff, then there are __very real, very profitable__ solutions. Please give us a call at **1-800-414-5285** to find out how you can realize the benefits of being an SBA lender **without** incurring all of the usual costs.

Please contact us at **1-800-414-5285** to find out more.

More info about **504 Loans**: **CDC 504 Program**