A type of prepayment penalty in which the penalty decreases over a period of time up until a specified term. If the borrower chooses not to pay the loan off at the end of the term, the declining balance will begin over again. Also called “capped fees”

Example

A 30 year loan has a declining balance prepayment penalty with the penalty specified to be 5% of the loan amount for the first year, 4% for the second year, 3% for the third year, 2% for the fourth year, until the fifth year when the borrower has the option of paying the loan off with 0% penalty (no penalty at all).