Estimate your prepayment penalty before refinancing or selling. Understand the true cost of exiting your commercial loan early and compare penalty structures.
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Yield maintenance compensates the lender for lost interest when you prepay. It calculates the present value of the difference between your note rate and the current Treasury rate for the remaining term. When rates drop, yield maintenance gets expensive because the rate gap widens.
Yield maintenance is cheapest when current Treasury rates are close to or above your note rate (the rate differential shrinks or disappears), or when you are very close to loan maturity (fewer months of lost interest). In a rising rate environment, YM penalties can be near zero.
Defeasance replaces your loan collateral with Treasury bonds instead of paying a penalty. Common in CMBS loans. It is often more expensive than yield maintenance because of transaction costs (legal, accountant, securities dealer fees). Defeasance can cost $50K–$150K+ in fees alone.
Step-down penalties (e.g., 5-4-3-2-1%) decrease each year and are simpler to calculate. Flat penalties (1–3% of balance) are the most borrower-friendly. When negotiating new loans, the prepayment structure should be a key consideration — our advisors help you get the best terms.
Different loan types come with different prepayment terms.
| Structure | Typical Cost | Common In | Borrower Impact |
|---|---|---|---|
| Yield Maintenance | 1–5%+ of balance | Bank CRE, Life Co | Expensive when rates drop |
| Defeasance | Varies + $50K–$150K fees | CMBS, Conduit | Complex, can be very costly |
| Step-Down (5-4-3-2-1) | 1–5% declining | Portfolio, DSCR | Predictable, decreasing |
| Flat Penalty | 1–3% of balance | Bridge, Some CRE | Simple, fixed percentage |
| Lockout Period | Prepay prohibited | CMBS (first 2–5yr) | Cannot exit during lockout |
| Open Prepay | $0 | Some Bridge, Portfolio | Most borrower-friendly |
Common questions about yield maintenance and prepayment penalties.
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