Prepayment Penalties - Step Down, Yield Maintenance, and Defeasance Explained

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Understanding Prepayment Penalties on Commercial Loans: A Detailed Guide

In this highly informative video, Trevor shares crucial insights into the three types of prepayment penalties - Step-down Prepayment Penalty, Yield Maintenance, and Defeasance - found in commercial loans. He provides detailed examples and calculations, showcasing how each type of prepayment penalty could impact borrowers if they decide to pay their commercial loans ahead of schedule, which can either be beneficial or extremely expensive. This video is essential viewing for any commercial loan borrower looking to navigate their way around prepayment penalties and mitigate risks that could have significant financial impacts.

0:00 Prepayment Penalties, Yield Maintenance, and Defeasance
00:42 Step-Down Prepayment Penalty
01:18 Yield-Maintenance
02:29 Defeasance

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[familialfsme]

Thank you Professor, Top professor who explains everything and gets straight to the point.

[smolentsevalexander]

Straight to the point, great visualization, well formulated explanation. Great video as always!

[vinceliu]

So with defeasance, you would use the proceeds that would have been used to pay off the loan to purchase treasury securities instead? And the proceeds can come from another loan/institution (refinance) or a buyer (sale)?

[shrishtisunder]

Is 3-2-1 Step-Down prepayment penalty cumulative where 3% added on first year is then summed with another 2% in the second year for 5% or does the 3% only last duration of one year then get replaced by a different 2%? Does that 3% then added 2% then added 1% on mortgage all gain accrued interest or any interest over the prepayment paid years?