What loan offer is better.

I am getting the loan for the rental property. I have the following two options for the prepayment penalty.


5 year fix with 20 year amortization.
rate: 7%

Prepayment penalty option 1:

2% penalty if the loan is paid before 5 years.

Prepayment penalty option 2:

first year: 5%
second year: 4%
third year: 3%
fourth year: 2%
fifth year: 1%

I am not planning on selling the property before 5 years but you never know. I think that second option helps me only in the last year so I am leaning towards going with the first option as interest rate is same for both options.

I will appreciate any comments.

Why do you have a pre penalty? You don’t need one!

This is a commercial loan for the office condo. So far I have 3 commitments and all of them have prepayment penalty in some form.

I’d go with Option 1, the only benefit of Option 2 is if you sell/refinance from month 48-60. All other time frames Option 1 is the same or better.

Thanks for the responses. I signed the commitment with option 1.