A prepayment charge sized so the lender or investor earns about what it would have earned had the loan run to the end of the yield maintenance period.
Yield maintenance ties the cost of paying off early to interest rates. If market yields are below the loan’s rate when you prepay, the lender would have to relend the money for less, and the charge covers that gap for the time remaining. If yields have risen above the loan’s rate, the formula result shrinks and a minimum takes over.
Fannie Mae’s servicing guide shows the working parts. Before the yield maintenance period ends, the loan documents generally require the greater of 1 percent of the unpaid balance or yield maintenance. The investor’s share is principal prepaid, times the pass-through rate minus the yield rate named in the documents, times a present value factor. If that result is negative the investor gets nothing.
To see the scale, take $2,000,000 prepaid, a rate gap of 1.5 percentage points and, purely for illustration, a present value factor of 4: the product is $120,000, far above the $20,000 minimum.
After the period ends, the guide says documents usually call for a flat charge, commonly 1 percent, and then an open period near maturity with no charge.
How it shows up in the data here
Not shown on this site. No call report, HMDA row or SBA record says how a loan may be prepaid. Yield maintenance belongs to agency and securitized lending, so the nearest view here is who makes those loans: loan comps for multifamily lists lenders by multifamily loans made, with the median reported rate and term. The formula that binds you is the one in your own loan documents.
Go further
- Multifamily loan comps: Multifamily loans made, with median reported rate and term by lender.
- Multifamily lenders: Lenders by multifamily loans held and made, by state.
- Multifamily loan checklist for 5+ unit properties: A larger apartment loan can go to five kinds of lender. They want much the same package. They differ on recourse, term, prepayment, speed and what they ask of the sponsor.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Prepayment penalty: A charge a loan agreement sets for paying off some or all of the principal before a stated date. Common forms are a step-down schedule, yield maintenance and defeasance.
- Defeasance: A way to free a property from a loan before maturity by swapping the collateral: the borrower pledges securities that make the remaining payments, and the lien on the property is released.
- Step-down prepayment penalty: A prepayment charge set as a percentage of the amount prepaid that drops on a fixed schedule, usually each year, until it reaches zero.
- Agency lender: A lender authorized to make apartment loans that Fannie Mae or Freddie Mac then buys or backs, under those companies' rules instead of the lender's own.
- Fixed rate loan: A loan whose interest rate is set at closing and does not change for a stated period, often the whole term, so the principal and interest payment stays the same.
- CMBS conduit loan: A commercial property loan made to be pooled with other loans and sold to investors as commercial mortgage-backed securities, not kept by the lender that made it.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.