 | |  | |  | |  | |  |
| Archwood Real Estate, Inc. Investment Brokerage & Real Estate Financing (818) 376-8582 |
What is a yield-maintenance prepayment penalty?
Yield maintenance is a prepayment penalty that, in the event the borrower pays off a loan before
maturity, allows the lender to attain the same yield as if the Borrower had made all scheduled
mortgage payments until maturity. Yield maintenance premiums are designed to make lenders
indifferent to an early prepayment by a Borrower.
For example, let's assume a 15-year interest-only $1,000,000 mortgage at 7%. After the 5th
year the borrower decides to refinance. The yield maintenance prepayment penalty would equal
the difference between the current 7% rate and the yield that the bank would receive reinvesting
the loan proceeds in a 10-year Treasury note. (10 years being the remaining term of the loan).
To keep this example simple, let's say that at the time of prepayment, the 10-year Treasury note
is 5%. The Borrower would be required to pay the lender the present value of the 2% difference
for each year over the loan's 10 remaining years, or $200,000. This penalty will make the lender
"whole" and insure that the lender will not experience an economic loss as a result of being paid
prior to the loan's maturity. This same formula applies to amortizing loans, however, it is much
easier to illustrate with an interest-only loan.
maturity, allows the lender to attain the same yield as if the Borrower had made all scheduled
mortgage payments until maturity. Yield maintenance premiums are designed to make lenders
indifferent to an early prepayment by a Borrower.
For example, let's assume a 15-year interest-only $1,000,000 mortgage at 7%. After the 5th
year the borrower decides to refinance. The yield maintenance prepayment penalty would equal
the difference between the current 7% rate and the yield that the bank would receive reinvesting
the loan proceeds in a 10-year Treasury note. (10 years being the remaining term of the loan).
To keep this example simple, let's say that at the time of prepayment, the 10-year Treasury note
is 5%. The Borrower would be required to pay the lender the present value of the 2% difference
for each year over the loan's 10 remaining years, or $200,000. This penalty will make the lender
"whole" and insure that the lender will not experience an economic loss as a result of being paid
prior to the loan's maturity. This same formula applies to amortizing loans, however, it is much
easier to illustrate with an interest-only loan.
 |
| |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
| |
 |
 |
 |
 |
 |
 |
 |
| Archwood Real Estate, Inc. - 16217 Kittridge St., Van Nuys, CA 91406 - Phone: (818) 376-8582 - Fax: (818) 376-8572 California Broker #01445207 |
