Does a commercial loan usually have repayment penalty?

[Luke Lattimer]

We are looking at a loan on a 7 unit apartment building including a house on the property.

The bank is saying that a five year resetting rate on the mortgage is normal. Is this true?

Also they are saying there is a prepayment penalty.

Are these normal? This is our first loan that has to be done as a commercial loan.

[Will Gaston]

I have lots of commercial loans and the answer is "sometimes."

Here are the most common ones in my market of Columbia, SC:

1) 5% in paid off in year 1, 4% if paid off in year 2, 3% in year 3, 2% in year 2, 1% in year 1

2) 3% in year 1, 2% in year 2, 1% in year 3 and nothing after that

3) 1% if paid off anytime prior to balloon.

Watch out for #1. Absolutely brutal.

Many banks won't have them and the ones that do may willing to negotiate. Be very careful signing a note with a pre-pay. You never know when you may have to re-fi for other reasons besides rate.

I have paid 50k+ in prepays in the last 3-4 years so I am particularly sensitive to them.