Paying Interest Only Loan off Early

[Vernon Trice III]

When obtaining an interest only commercial real estate loan, why are there penalties associated with paying the debt off early? What are the pros and cons of both sides and why would anyone do it ? Or not do it for that matter?

[Kenneth Reimer]

@Vernon Trice III An investor would pay off the note and absorb a prepayment penalty due to a variety of reasons. 

1. The prepayment is such that refinancing at a lower interest rates makes sense for their hold time.

2. The deal has become a problem for them.

3. Playing defense late in a market and 1031 exchanging into a higher quality area.

4. They have no choice and must sell.

Investors typically weigh their desire to sell against the size of the prepayment penalty. The bigger the prepay, the bigger incentive you must have to sell your property in order to pull the trigger.