The Quick Read: A make-whole fee is a formula that compensates the lender for interest it loses when you repay early, so the cost depends on where market yields sit on the day you exit. A declining exit fee is a fixed schedule, a percentage of the balance that shrinks each year and usually reaches zero. The declining fee is the more predictable choice, while a make-whole can cost far more if you exit after yields have fallen.
- A declining fee lets you calculate the worst-case exit cost for any year on day one.
- A make-whole is unknown until payoff, because it moves with market yields.
- Neither structure changes who qualifies, and neither enters the DSCR ratio.
- Both are note terms owed by the borrowing LLC, separate from non-recourse carve-outs.
- A hold longer than the penalty window makes both matter less.
The Honest Answer: Who Each Option Is For
The declining exit fee suits most investors who might sell or refinance on an uncertain schedule. You can put a number on it for every year of the loan. That number goes into your exit model as a plain cash item.
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The make-whole suits a borrower who is sure of a long hold, or who has negotiated a clean formula with a sensible floor and window. It is a gamble for everyone else. The cost lands hardest at the moment many investors want out: after yields have dropped and a refinance looks attractive.
Here is a wry truth from the closing table. Many borrowers read the monthly payment line and skip the prepayment rider. The rider is where this choice actually lives.
Your best option depends on your exit plan, not on which structure sounds friendlier. The rest of this piece walks through both, side by side.
Key Terms Defined
Make-whole: A prepayment charge that puts the lender back where it would have been had you paid as scheduled. It is the same mechanism as yield maintenance.
Yield maintenance: The present value of the lender’s remaining scheduled payments, discounted at a benchmark yield named in the note, minus your outstanding balance. Investopedia describes it as a premium that lets the lender attain its expected yield.
Declining exit fee (step-down): A stated percentage of the balance repaid that falls each loan year. It usually reaches zero at the end of the window. You will also hear it called a step-down prepayment penalty.
Non-recourse: A loan feature in which the lender looks to the property for repayment rather than to your personal assets. Carve-outs can still create personal exposure.
PITIA: Principal, interest, taxes, insurance, and association dues. DSCR compares monthly rent to this total.
Floor: A minimum fee written into the note. A schedule with a floor may never reach zero.
Side-by-Side
The columns below describe published industry norms for each structure. The wholesale network Lendmire works with places both kinds of files, and the actual terms come from the note on your loan.
| Factor | Make-Whole | Declining Exit Fee |
|---|---|---|
| How the cost is set | Present-value formula tied to a benchmark yield | Fixed percentage by loan year |
| Predictable on day one? | No, depends on yields at exit | Yes, schedule is known |
| Cost shape over time | Can stay high for the whole term | Falls each year, often to zero |
| Review basis | Property rent vs. PITIA | Property rent vs. PITIA |
| Documentation | Lease or rent schedule, appraisal, entity papers | Same |
| Entity vesting | Borrower LLC owes the fee | Borrower LLC owes the fee |
| Reserve expectations | Same under both, set by lender and file | Same under both |
| Typical home | Permanent, agency, and securitized debt | Bridge and DSCR-style notes |
A trade glossary on prepayment penalties describes step-downs as common on bridge and DSCR loans, with yield maintenance and defeasance more typical of permanent and securitized debt. That matches what a broker sees: step-downs dominate in this lane, and make-whole appears less often.
Notice what is missing from the table. Qualification, documents, and reserves are identical across the two structures. The exit fee is a back-end cost, so it does not enter the coverage ratio. You qualify on the same property-level rent test either way.
How a Declining Exit Fee Works
The note sets a schedule by loan year. Each year’s percentage applies to the balance being repaid, not to your original loan amount and not to interest. A common illustration runs from a higher percentage in year one down by one point a year to zero, as in the 5-4-3-2-1 example in the glossary above. Shorter windows also exist. Treat any such schedule as an illustration, not a program term.
Three details separate a good schedule from a bad one:
- Does it reach zero? A schedule with a floor never burns off inside the term. Practitioners treat that as worse than a clean step-down.
- What triggers it? Some notes charge on both sale and refinance. Others charge on refinance only, which the market sometimes calls a soft penalty. A sale carve-out is something you negotiate, never something to assume.
- Are partial paydowns allowed? Some notes let you pay down a slice without a fee. Others do not.
Here is a point many borrowers miss. The fee applies to the balance at payoff. A loan that barely amortizes in the early years keeps that balance high, so the dollar cost falls more slowly than the percentage suggests.
How a Make-Whole Works
A make-whole has five moving parts. Read each one in the note.
1. The lender takes your remaining scheduled payments.
2. It discounts them at a benchmark yield named in the note, usually a Treasury yield of comparable remaining term. Adventures in CRE describes the fee as generally the present value of the lender’s remaining cash flows at an agreed benchmark, with the outstanding balance then subtracted.
3. It subtracts your principal balance. Sample contract language puts the result at no lower than zero.
4. When market yields sit below your note rate, the fee rises. When yields have risen, it falls, sometimes to nothing.
5. Some notes add a minimum floor, which keeps a charge in place even when yields rise.
The theory behind it is fair. Neither side gains or loses from rate swings. The practical problem is that you cannot know the number until payoff. Ask what the benchmark is, whether discounting runs to maturity or to an open window, and whether a floor applies.
A make-whole is not simply a bigger percentage. It is a different kind of exposure. Picture two borrowers who both exit in year three. One faces a number printed in the note. The other waits for a calculation that depends on the bond market that month.
When a Declining Exit Fee Is the Better Fit
Choose the declining schedule when certainty matters more than anything else. That covers most investors who run a value-add plan, a buy-rehab-refinance plan, or any hold where the exit date is a guess.
It fits especially well in these situations:
- A planned refinance within a few years. You can price the fee into the refinance before you commit to the deal.
- A possible sale. You know the worst-case cost for each year, so you can set a floor on your sale price.
- A cash-out plan after seasoning. On a cash-out refinance, select lenders in the network typically top out around 75% LTV, with about 6 months of seasoning common. If you plan to cash out and then exit, a known fee keeps the whole sequence modelable.
- A portfolio you will rebalance. Fixed schedules make each property’s exit cost a line in a spreadsheet.
The catch: read the floor and the trigger language. A step-down that hits both sale and refinance with a floor that never reaches zero can be worse than it looks. The declining structure is only as good as its last year.
When a Make-Whole Is the Better Fit
A make-whole earns its place in a narrower set of files. It fits a borrower who truly expects to hold through the term, who values a lower penalty burden in the later years, or who has negotiated protective terms.
Consider a make-whole when:
- You plan to hold to maturity. If you never prepay, the formula never bites, and you give up nothing.
- You expect yields to rise. A rising-yield environment shrinks the formula, sometimes to its floor or to zero.
- The note offers sale protection. A carve-out for a third-party sale, a notice window, or a calculation cap can turn a risky formula into a manageable one.
- The loan is large, long, and permanent in character. Make-whole is more typical of permanent and securitized debt than of short DSCR notes, so it tends to appear where the loan resembles that debt.
Honestly, this is a narrow lane for small-balance rental loans. If a lender hands you a make-whole and a step-down on the same file, ask for a worked example of the make-whole at two yield scenarios. If the lender cannot produce one, that tells you something.
Non-Recourse and the LLC Borrower
The loan, not the entity. An LLC does not make a loan non-recourse. The guaranty language decides that.
Under either exit structure, the borrowing LLC generally owes the fee, and the fee is a contractual payoff cost, separate from default exposure. Lenders usually carry out this kind of lending through LLC vesting, subject to lender program eligibility.
The exit fee and the carve-outs are different risks. A prepayment fee is owed on any covered payoff. A carve-out is a default-related exposure that can convert a non-recourse loan to full recourse. One law-firm summary, Murphy PC, describes a single-purpose-entity covenant that required the borrower to remain solvent. A cash-flow decline breached it and tripped the carve-out. Its example was a large securitized loan, not a typical rental loan, but the lesson carries: covenants live in the documents.
For how title and vesting affect eligibility, see Lendmire’s article How Trust vs LLC Vesting Affects Non-Recourse DSCR Portfolio Eligibility.
If you hold several properties under one loan, check whether releasing one property triggers the fee on only the released amount. That is a document question, so get the answer in writing.
Does a Federal Cap Apply?
This is a common misconception, so it deserves a direct answer. The federal limits on prepayment penalties, which cap the fee at 3% in the first year, 2% in the second year and 1% in year three, with nothing after that, apply to covered consumer-purpose mortgages under 12 CFR 1026.43. A DSCR loan to an LLC for a rental is a business-purpose loan, and business-purpose loans are generally outside those caps.
That means both a make-whole and a multi-year step-down are structurally possible on a DSCR note. Any limits come from state law and the note itself. State law may limit penalties in some places, and you should confirm what applies to your loan. Whether a loan is business-purpose is a fact-specific question, so ask a qualified attorney about your own file.
What Triggers the Fee
Always read the trigger language. Typical triggers include:
- A sale of the property, unless the note carves it out.
- A cash-out or rate-and-term refinance.
- A full voluntary payoff.
- A large partial paydown, depending on the allowance.
- Acceleration after a default, depending on the documents.
- A transfer to a new entity, depending on due-on-sale and assumption language.
Casualty and condemnation payoffs are often treated differently, so check that too. Moving a property between LLCs can trip a due-on-sale clause, so do not assume an internal transfer is free.
Investors in public forums have said an existing lender may waive the penalty if you refinance with that same lender. Treat that as anecdote, not a plan. Otherwise you pay it, and you model it as a cash item out of sale or refinance proceeds.
Matching the Structure to Your Exit Plan
| Your plan | Usually the better fit |
|---|---|
| Sell or refinance within a few years | Declining exit fee |
| Unsure of the exit date | Declining exit fee |
| Hold to maturity | Either; check the floor |
| Expect yields to rise | Make-whole can be cheaper |
| Expect to refinance when yields fall | Declining exit fee |
| Roll up a portfolio later | Declining exit fee with partial-paydown rights |
The yield-direction row is the key asymmetry. A make-whole costs the most at exactly the moment a refinance looks most attractive. A declining fee does not care where yields go.
A longer hold weakens the case for caring about either one. If you plan to sit on the property past the window, the structure matters mostly as a safety net for the day your plans change.
Reading and Negotiating the Clause
Before signing, find these terms in the note or prepayment rider:
- The benchmark or reinvestment rate definition.
- Whether discounting runs to maturity or to an open window.
- Any minimum floor.
- The date the fee is calculated.
- The trigger list, including sale, refinance, and partial paydown.
- When a declining schedule reaches zero, and whether it does.
Then ask for the levers. A fee floor lower than proposed, a carve-out for a third-party sale, a notice window, a cap on the calculation, and partial-paydown rights are all fair asks. Whether a lender agrees depends on the file.
Common mistakes are easy to avoid. Do not read the percentage as a percentage of interest, since it applies to the balance. Do not assume a sale carve-out exists. Do not overlook a floor. And do not assume the fee affects whether you qualify.
Where Qualification Actually Sits
Both structures run on the same underwriting. A DSCR loan qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. Across the wholesale network, select programs start at a 1.00 coverage ratio, and stronger ratios open better leverage. A separate select-lender path takes coverage below 1.00, with leverage and terms adjusted.
Most files land at 75%–80% LTV on a purchase. Credit floors start at 620 in parts of the network, with most programs wanting around 660 and 700 or better unlocking the strongest tiers. Reserves commonly run about 6 months of PITIA, stepping up to about 9 months on loans above $1,500,000. Standard programs reach up to $3,000,000. All of this is subject to lender guidelines and the individual file.
One caution applies here. Clearing 1.00 does not mean positive cash flow. DSCR compares rent to PITIA only, so repairs, vacancy, management, and capex sit outside the calculation. And the exit fee sits outside it too, which is why you have to model it yourself.
Lendmire’s complete DSCR loans guide covers the full program picture. Tax treatment varies; consult a qualified professional.
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Reach the team at 828-256-2183.
This article is general education, not legal or tax advice. Consult a qualified attorney or CPA about your own loan documents and situation.
Frequently Asked Questions
Does the exit fee change my DSCR ratio?
No. The ratio compares rent to PITIA, and the exit fee is a one-time cost at payoff. It does not enter the calculation under either structure. You still need to model it as a cash item at sale or refinance.
Can I avoid the fee by selling instead of refinancing?
Only if the note says so. Some notes charge on both. Others charge on refinance only. A sale carve-out is a negotiated term, so look for it in the trigger language before you rely on it.
What happens to a make-whole if yields rise?
The formula usually falls, sometimes to zero or to a stated minimum floor. If yields have dropped since closing, it rises. That is why the cost is unknown until payoff.
Does a declining schedule always reach zero?
Not necessarily. Some schedules carry a floor that never burns off inside the term. Check the note for the final-year percentage and any minimum charge.
Is make-whole the same as yield maintenance?
Yes. The terms describe the same present-value mechanism. You will also see prepayment penalty, early exit fee, and call protection used for related ideas, so read the clause itself.
Hold-period math decides this choice more than any label does, and a fee you can price in advance almost always beats one you must guess at.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage built around DSCR investor lending, with programs available in 41 markets, including Washington, D.C. DSCR lenders commonly evaluate rental-income coverage instead of personal income paperwork — a practical fit for LLC-owned and multi-property investors. Terms vary by lender, property, leverage, and program. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Investopedia – Yield Maintenance
2. YieldStack glossary – Prepayment Penalty
3. Adventures in CRE – Yield Maintenance
4. Murphy PC – Bad-Boy Carveout
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can a Ground-Up Builder Exit Hard Money Into a DSCR Loan Before Leasing? · Can a Single-Family Hard Money Bridge Loan Exit Into a DSCR Loan? · Can an LLC Refinance a Virginia Rental With a DSCR Loan?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.