Declining Balance
Glossary of Terms Related to Commercial Mortgages and Loans
A type of prepayment penalty, according to which the penalty decreases over a period of time, up until a specified term. For instance, a 20 year loan may have a declining balance prepayment penalty stating that the penalty is 5% of the loan amount for the first year, 4% for the second year, 3% for the third year, etc., until the fifth year, when the borrower has the option of paying the loan off without penalty. If the borrower chooses not to pay the loan off at this point, then the declining balance begins over again. Also called "capped fees".
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