🏦 Mortgage Points, Prepayment Penalties & Refi Traps: The True Cost of “Low Rates” 🔍

💰 Why the Lowest Mortgage Rate Can Be the Most Expensive Loan 📉

Bill Rapp, Commercial Mortgage Broker

February 21, 2026•3 min read

💰 Why the Lowest Mortgage Rate Can Be the Most Expensive Loan 📉

🏦 Mortgage Points, Prepayment Penalties & Refi Traps: The True Cost of “Low Rates” 🔍

Why the Lowest Rate Is Often the Most Expensive Loan

Most borrowers are trained to shop one number: the interest rate.

But sophisticated borrowers and real estate investors understand something different:

The lowest rate on paper can produce the highest total cost over the life of the loan.

As a mortgage broker and capital advisor at Medallion Funds, I regularly review loan estimates where the “lowest rate” option quietly contains points, prepayment penalties, and structural exit traps that cost tens of thousands more over time.

Let’s break down where the hidden cost actually lives.

1️⃣ Points vs. Lender Credits: The Rate Illusion

A lender can lower your interest rate — but rarely for free.

Discount Points

Paying 1–2+ points (1 point = 1% of loan amount) reduces your rate.
On a $750,000 loan, 2 points = $15,000 upfront.

The real question:
Will you hold the loan long enough to recover that cost?

If you refinance, sell, or recapitalize in 3–5 years, you may never reach break-even.

Lender Credits

The opposite structure increases the rate slightly but provides a lender credit to offset closing costs.

For borrowers who plan to refinance, reposition, or sell within 36–60 months, credits often outperform points.

Strategy beats rate shopping.

2️⃣ Prepayment Penalties: The Silent Wealth Transfer

Many “lowest rate” loans — particularly:

·DSCR loans

·Commercial mortgages

·Non-QM investor loans

·Certain bank portfolio products

Include prepayment penalties.

Common structures:

·3-2-1 step-down penalties

·5-year declining penalties

·Yield maintenance

·Defeasance (commercial)

If rates fall and you refinance early, you could pay:

·$25,000

·$50,000

·Even six figures on larger deals

A lower coupon becomes irrelevant if exit flexibility disappears.

Sophisticated borrowers price optionality — not just rate.

3️⃣ Exit Costs & Refinance Traps

The most expensive loans are often those that restrict your ability to exit.

Examples:

Balloon Structures

A 5-year balloon at a low rate sounds attractive.
But what if market rates rise at maturity?

Now you refinance into:

·Higher rates

·Stricter underwriting

·Lower valuation

·Additional equity injection

DSCR Refi Trap

If you close at maximum leverage and rents soften, your DSCR may not support refinancing later — even if rates improve.

That low initial rate becomes a liquidity event.

4️⃣ Total Cost of Capital > Headline Rate

Professional borrowers evaluate:

·APR

·Total interest paid

·Points amortization

·Exit penalties

·Flexibility

·Refinance assumptions

·Liquidity impact

The correct framework is:

Cost of capital over your intended hold period.

Not the lowest rate today.

5️⃣ When a Higher Rate Is Actually Smarter

You may intentionally choose:

·Slightly higher rate

·No prepayment penalty

·Lower upfront points

·Stronger refinance flexibility

That structure can:

·Protect liquidity

·Reduce risk

·Improve IRR

·Preserve exit options

In many investor scenarios, that flexibility creates more long-term wealth than saving 0.25% on rate.

The Bottom Line

The lowest mortgage rate is often the most expensive loan because it hides cost in:

·Points

·Penalties

·Reduced flexibility

·Exit risk

Smart borrowers don’t chase rate.
They engineer structure.

If you want to review your loan options through a capital strategy lens — not just a rate sheet — connect with Medallion Funds.

Because structure > headline pricing.

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Bill Rapp - Commercial & Residential Mortgage Broker

Whether you're a first-time homebuyer, a seasoned investor, or a business owner with ambitious plans, securing the right financing is crucial. At Medallion Funds, we take the guesswork out of mortgages, offering a comprehensive suite of residential and commercial loan options to fit your unique needs. Looking for Your Dream Home? We understand the excitement and challenges of navigating the residential real estate market. Our experienced mortgage brokers will guide you through every step, from pre-qualification to closing. We offer a variety of loan programs to suit your financial situation, including: • Fixed-rate mortgages: Offering stability with predictable monthly payments. • Adjustable-rate mortgages (ARMs): Providing competitive rates for a set period. • FHA loans: Making homeownership accessible with lower down payments. • VA loans: Rewarding veterans with attractive rates and flexible terms. Investing in Your Business Future? Growth often requires capital, and we can help you unlock the potential of your commercial property. Our brokers specialize in a wide range of commercial loan options, including: • Purchase loans: Financing the acquisition of new buildings or land. • Construction loans: Facilitating the development of your project. • Refinance loans: Restructuring your existing mortgage for better terms. • SBA loans: Providing access to government-backed financing for qualified businesses. The Medallion Funds Difference: We go beyond simply finding a loan. We take the time to understand your goals and develop a personalized strategy. Here's what sets us apart: • Expertise: Our brokers have a deep understanding of both residential and commercial lending. • Competitive Rates: We leverage our strong lender relationships to secure the best possible terms. • Streamlined Process: We handle the paperwork, keeping you informed every step of the way. • Exceptional Service: We're committed to providing you with a positive and stress-free experience. Ready to Take the First Step? Contact Medallion Funds today for a free consultation. Let's discuss your financing needs and help you achieve your dreams!

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