Blog › Blog
Many hard money loans include a prepayment penalty or minimum interest requirement — meaning if you pay the loan off before a certain point, you owe additional interest regardless of the actual hold time. This is a real cost that investors sometimes discover at closing when the property sells faster than expected. Model it before you commit to the loan.
A prepayment penalty is a fee charged if you pay off the loan before the penalty period expires. On a hard money loan, this typically takes one of two forms:
Minimum interest period: The lender requires a minimum number of months of interest, regardless of when you actually pay off the loan. If the minimum is 6 months and you pay off at month 3, you owe the remaining 3 months of interest at closing.
Step-down penalty: The penalty decreases over time — for example, 3% of the loan balance if paid off in year one, 2% in year two, 1% in year three. Hard money loans are rarely long enough for this to apply across multiple years, but some lenders use it.
Yield maintenance: Less common in hard money, this formula ensures the lender earns the same yield they would have received if the loan ran to maturity. It can be complex to calculate and is more common in commercial lending.
Hard money lenders make money from interest income over time. When a loan pays off in 60 days instead of 12 months, the lender earns a fraction of the expected interest. Origination fees (points) compensate for some of this, but minimum interest requirements protect the lender's yield on short-hold scenarios.
From the lender's perspective, deploying capital efficiently requires a predictable minimum hold period. A loan that pays off in 45 days was deployed and re-deployed at significant overhead cost for minimal return.
Example:
At month 4, you have paid 4 months of interest ($11,000). But the minimum is 6 months ($16,500). At payoff, you owe the remaining 2 months of minimum interest ($5,500) even though the loan is being retired.
That $5,500 is a real cost that appears at closing. It needs to be in your deal analysis.
Some hard money lenders offer loans with no prepayment penalty — or no minimum interest. This matters most when:
If getting to payoff fast is a realistic scenario on your deal, specifically ask lenders about their prepayment terms before submitting. A loan with a 6-month minimum at 11% on a $300,000 deal costs $5,500+ extra if you close in 3 months. That is worth knowing.
"Does this loan have a prepayment penalty or minimum interest period? If so, how long and how is it calculated?"
This is a standard, reasonable question that any professional lender will answer clearly. The answer should be in the term sheet and in the loan documents. If you do not see it in the term sheet, ask before you accept.
Do not discover the minimum interest requirement at the closing table when the title company presents the payoff calculation.
In your deal analysis, model two scenarios:
Standard hold: Your projected renovation timeline plus expected days on market. Calculate total interest based on this hold period.
Fast close (minimum interest period): What if the property sells faster than expected? What does the minimum interest cost in this scenario?
The difference between these two scenarios is your prepayment penalty exposure. If it is a number that does not materially change the deal's profitability, the loan is fine. If a fast sale triggers a prepayment cost that eliminates your margin, consider a lender whose terms do not penalize you for executing well.
Verify your email and receive 5 free Credits. Use one for a real residential lender search or one quote-request batch to as many as four lenders. No card required.
Try It Free →