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
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.
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More info about 504 Loans: CDC 504 Program