Prepayment · Nationwide · Updated October 2026
The cheapest rate on a term sheet can carry the most expensive exit. Here is how the three common prepayment structures are calculated, what each costs in dollars when rates fall, hold or rise, and how to pick the one that fits your plan.
By Michael McGovern, Founder | 25+ Years in Commercial LendingCommercial Mortgage Connection · Yonkers, NY The short answer
A commercial mortgage prepayment penalty is what the lender charges when you repay a fixed-rate loan before maturity, and the three common structures price it very differently. The honest part first: there is no structure that is cheapest in every market, and no broker can remove a commercial mortgage prepayment penalty that is already in your loan documents. What you can control is choosing the structure that matches your exit plan, and timing the payoff.
- Yield maintenance: on Fannie Mae DUS loans, the principal prepaid times the gap between the bond rate and a Treasury yield, discounted to today, with a floor of 1% of the principal prepaid.
- Defeasance: instead of paying the lender, you buy government securities that replace your remaining payments and hand them to a successor borrower, so the property is released.
- Step-down: a fixed percentage of the balance that declines over time, such as 5% in the early years falling to 1%, whatever rates do.
- Related read: how prepayment fits the fixed versus floating decision is covered in our guide to fixed and variable rate commercial mortgages.
Data points checked 2 October 2026 against Fannie Mae, J.P. Morgan, Greystone and FRED sources. Treasury yields move daily, so every commercial mortgage prepayment penalty figure here is dated or an example.
What this page covers
- Commercial mortgage prepayment penalty basics: the anatomy of an early payoff
- What each of the three structures charges, and how
- What it costs to pay off a commercial mortgage early, in dollars
- Why two structures move with rates and one does not
- Treasury yields: the invisible third channel
- What borrowers can actually control: 4 levers
- What this page will not tell you: three honest limits
- Does this apply in your state?
- Yield maintenance vs defeasance vs step-down: FAQ
Commercial mortgage prepayment penalty basics: the anatomy of an early payoff
A fixed-rate commercial mortgage is a promise of a stream of payments at a set rate for a set term. When that loan is sold into a bond, the investors are counting on that stream. If you pay it off early and rates have fallen, they have to reinvest your money at a lower return, and the prepayment provision is how they are made whole. That is why the cost of leaving early depends so heavily on where rates are on the day you pay, and why the same loan can cost very little to prepay one year and a great deal the next.
The commercial mortgage prepayment penalty terms are fixed at closing and written into the loan documents, so the decision that matters most is made long before the payoff. Three numbers drive every structure: the balance you are repaying, the time left until the protection ends, and, for two of the three structures, the gap between your loan's rate and current Treasury yields. The rate side of that equation is explained in our guide to commercial mortgage rates.
Your commercial mortgage prepayment penalty is signed at closing, years before most borrowers think about paying the loan off.
What each of the three structures charges, and how
Yield maintenance. Fannie Mae's June 2026 overview of its DUS program spells out the calculation: the amount of principal being repaid, multiplied by the difference between the MBS pass-through rate and the yield on the applicable U.S. Treasury constant maturity, multiplied by a present value factor for the time left in the yield maintenance period. The borrower owes the greater of that amount or 1% of the principal prepaid, and after the yield maintenance period ends, a 1% prepayment premium may still apply.
Note that the formula uses the pass-through rate paid to bondholders, which sits below your note rate. Greystone notes that a common yield maintenance expiration is six months before maturity, and that borrowers can choose periods ranging from three years to the full term.
Defeasance. Rather than repaying the lender, the borrower replaces the property as collateral with a portfolio of government securities whose payments match the loan's remaining payments, and transfers that portfolio to a successor borrower that assumes the debt, so the property is released. J.P. Morgan notes that estimating the cost of defeasance is more complex than calculating a prepayment premium, because it depends on the price of the securities on the day you buy them, plus the fees of the specialists who assemble the transaction. Fannie Mae also offers defeasance as an alternative to a prepayment premium.
Step-down, or declining premium. A set percentage of the outstanding balance that falls over time, for example 5% in the first years stepping down to 1%. Fannie Mae describes its declining premium as a percentage of the current unpaid balance that decreases over time, available on fixed-rate or adjustable loans. Because the schedule is written in advance, the cost of leaving is known on closing day.
What it costs to pay off a commercial mortgage early, in dollars
Here is the same loan under all three structures. An example $5,000,000 loan at 6.50%, 30-year amortization and a 10-year term is paid off after four years, with $4,752,979 outstanding. Yield maintenance follows the Fannie Mae formula with an example 6.00% pass-through rate and a period ending six months before maturity, 66 months away. Defeasance is the cost of securities that replace the remaining payments through maturity, including the $4,238,806 balloon, simplified to a single Treasury yield and excluding transaction fees. The step-down prepayment penalty follows an example 5-5-4-4-3-3-2-2-1-1 schedule, so year five costs 3%. These are illustrations of the math, not quotes.
| Treasury yield at payoff | Yield maintenance | Defeasance (securities cost above balance) | Step-down (3%) |
|---|---|---|---|
| 3.50% (rates fell) | $585,246 (12.31%) | $733,702 (15.44%) | $142,589 |
| 5.09% (30 Sep 2026) | $203,048 (4.27%) | $329,578 (6.93%) | $142,589 |
| 7.00% (rates rose) | $47,530 (1% floor) | -$110,804 (securities cost less) | $142,589 |
Three things stand out. When rates fall, the market-based structures get expensive fast: yield maintenance reaches $585,246 and defeasance $733,702, while the step-down stays at $142,589. At today's yields, the step-down prepayment penalty is still the cheapest of the three on this loan. And when rates rise above the loan rate, the order flips: yield maintenance drops to its 1% floor, the defeasance securities can cost less than the balance, and the step-down becomes the most expensive exit. Run your own balance through the free loan calculator before you request a payoff quote.
Two questions
What prepayment structure does your loan have?
Where are Treasury yields compared with your loan rate?
Why two structures move with rates and one does not
On yield maintenance vs defeasance, the shared logic is simple: both are built to make the investor whole, so both are priced off current Treasury yields. J.P. Morgan puts it directly: both options tend to cost less when interest rates rise, because higher Treasury yields mean fewer securities, or a smaller present value, are needed to cover the remaining payments, and the farther Treasury yields drop below the borrower's rate, the larger the premium. A step-down prepayment penalty never cares where rates are. It charges the percentage for the year you are in, which makes it predictable, cheap when rates have fallen, and comparatively expensive when they have risen.
| Structure | What sets the cost | Minimum | If Treasury yields have fallen | If Treasury yields have risen |
|---|---|---|---|---|
| Yield maintenance | Principal prepaid, bond rate minus Treasury yield, time left in the period | Commonly 1% of principal prepaid | Large premium | Falls to the minimum |
| Defeasance | Price of securities that replace the remaining payments, plus fees | Fees always apply | Securities cost well above the balance | Securities can cost less than the balance |
| Step-down | A scheduled percentage of the balance | The current year's percentage | Unchanged, often cheapest | Unchanged, can be most expensive |
The practical consequence is that the right structure depends on the exit you expect. A borrower who plans to sell or refinance within a few years usually values the certainty of a step-down. A borrower planning a long hold may accept yield maintenance in exchange for a lower rate, because the protection may have expired or shrunk by the time they leave. Which of these fits a fixed or floating loan is covered in our guide to fixed versus variable rate commercial mortgages.
Yield maintenance and defeasance are both priced off U.S. Treasury yields, so the cost of leaving early changes every trading day.
Treasury yields: the invisible third channel
For yield maintenance and defeasance, the single biggest variable is a number you do not control: the Treasury yield on the day of payoff. On 30 September 2026 the 5-year Treasury yield stood at 5.09% per FRED, and the 10-year at 5.26% on 29 September. In the example above, with 66 months left in the yield maintenance period, the present value factor is about 4.69, so every one percentage point move in the Treasury yield changes the premium by roughly $223,000 on a $4,752,979 balance, until the 1% floor takes over.
That sensitivity cuts both ways. A borrower who locked a loan when rates were low and now sees Treasury yields above the loan's bond rate may be looking at the cheapest exit the loan will ever offer. A borrower whose loan was written at a higher rate, and who now sees yields falling, faces a premium that grows with every rate cut. The cost of leaving is not a fixed fee; it is a live market price, which is why a payoff quote is only good for the day it is issued.
What borrowers can actually control: 4 levers
1. Match the structure to the exit at origination. If a sale or refinance within three to five years is likely, the certainty of a step-down is usually worth a slightly higher rate. If the plan is a long hold, yield maintenance with a shorter protection period may cost less overall.
2. Negotiate the length of the protection. Greystone notes that yield maintenance periods can range from three years to the full term. A shorter period costs something in rate, but it shrinks the present value factor and brings the 1% or open window closer.
3. Time the payoff. Check exactly where you sit in a step-down prepayment penalty schedule, because a few weeks can drop the percentage by a full point. On yield maintenance or defeasance, request quotes on more than one date, because the cost moves with Treasury yields every day.
4. Price the alternatives, then match the new loan. Compare the commercial mortgage prepayment penalty with the full interest saving of the new loan over your hold, and ask whether your documents allow a buyer to assume the loan. Commercial Mortgage Connection works a 750+ lender network with 500K+ programs across all 50 states, with $1B+ originated, every engagement led personally by founder Michael McGovern, and a loan review response within 4 hours. Prepayment terms also interact with how much a new lender will lend, as our guide to debt yield and loan sizing explains.
What this page will not tell you: three honest limits
It will not quote your payoff. The exact premium depends on the wording of your loan documents, including which Treasury yield applies, the bond rate used and how the period is measured. Only your servicer's written payoff statement is a real number.
It will not predict rates for you. Waiting for yields to rise so that yield maintenance falls is a rate bet. It can pay off, and it can also cost you a year of the higher rate you were trying to leave.
It is written by a brokerage. Commercial Mortgage Connection is paid when loans close, which is exactly why this page tells you that keeping your current loan, or waiting until the protection expires, can be the cheaper answer. If the commercial mortgage prepayment penalty exceeds the saving over your hold, do not refinance. CMC gives no legal or tax advice.
Does this apply in your state?
Commercial Mortgage Connection is headquartered in Yonkers, NY and places loans through its 750+ lender network in all 50 states. Yield maintenance, defeasance and step-down structures are written into loan documents and work the same way nationwide; the cost depends on the loan, not the state.
What varies by state are the closing costs that come with a payoff and a new loan, such as mortgage recording taxes, transfer taxes and title charges. Those can be large enough to change the refinance math, so confirm them for the state your property sits in. The full multifamily program menu, including prepayment options by lender type, is on our apartment building loans page.
Yield maintenance vs defeasance vs step-down: FAQ
What is a commercial mortgage prepayment penalty?
It is the charge a lender applies when a commercial mortgage is repaid before maturity, written into the loan documents at closing. The three common forms are yield maintenance, which compensates investors for lost interest; defeasance, where the borrower substitutes government securities for the property as collateral; and a step-down, a fixed percentage of the balance that declines over time.
How is yield maintenance calculated?
On Fannie Mae DUS loans, it is the principal being repaid multiplied by the difference between the MBS pass-through rate and the applicable Treasury yield, multiplied by a present value factor for the time left in the yield maintenance period. The borrower pays the greater of that amount or 1% of the principal prepaid. On an example $4,752,979 balance with a 5.09% Treasury, it comes to about $203,048.
Is defeasance more expensive than yield maintenance?
Often, but not always. Defeasance requires buying securities that replace every remaining payment, usually through maturity, plus third-party fees, so when rates have fallen it tends to cost more. When Treasury yields rise above the loan rate, the securities can cost less than the balance. In the example on this page, defeasance cost $329,578 against $203,048 for yield maintenance at today's yields.
What is a step-down prepayment penalty?
A step-down, or declining premium, is a set percentage of the outstanding balance that falls on a schedule, for example 5% in the early years stepping down to 1%. It does not change with interest rates, so the cost of leaving is known in advance. On a $4,752,979 balance, a 3% step-down costs $142,589 whether rates have risen or fallen.
Can rising interest rates lower my prepayment penalty?
Yes, for yield maintenance and defeasance. Both are priced off Treasury yields, so when yields rise the premium shrinks. Yield maintenance usually falls to a 1% minimum, and defeasance securities can cost less than the loan balance. A step-down does not change with rates. In the example on this page, yield maintenance drops from $585,246 at a 3.50% Treasury to $47,530 at 7.00%.
Sources
- Fannie Mae, DUS Program Overview. June 2026; yield maintenance formula, 1% minimum, 1% premium after the yield maintenance period, declining premium and defeasance options. Checked 2 October 2026.
- J.P. Morgan, Defeasance Clause: How It Works. 12 June 2024; substitute collateral, successor borrower, and how rates affect defeasance and yield maintenance. Checked 2 October 2026.
- Greystone, Yield Maintenance 101. 23 February 2024; 1% minimum, common expiration six months before maturity, periods from three years to the full term. Checked 2 October 2026.
- FRED, Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity (DGS5). 30 September 2026 observation, 5.09%. Checked 2 October 2026.
- FRED, Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity (DGS10). 29 September 2026 observation, 5.26%. Checked 1 October 2026.
Michael McGovernFounder, Commercial Mortgage Connection. Michael wrote this guide drawing on a career that began at Bear Stearns & Co. in 1997, ran through structuring billions of dollars in CMBS and MBS in Bear's F.A.S.T. group and selling mortgage product at Lehman Brothers, and now spans more than $1 billion in originated mortgages.
Stop guessing what it costs to leave. Price the exit before you sign, or before you refinance.
A senior banker reviews your current loan's commercial mortgage prepayment penalty terms and today's Treasury yields against what the market will offer on a new loan, with a response within 4 hours. If keeping your loan is the best answer, we will say so. Call 888-656-9812, live operator 24/7.
Facts on this page were verified against the cited Fannie Mae, J.P. Morgan, Greystone and FRED sources on 2 October 2026. Treasury yields, prepayment terms and lending conditions change, and every figure shown above is a dated observation or an example, never an offer or a forecast. Nothing on this page is a loan offer, a rate quote, a payoff quote, a prediction, or personalized financial, legal or tax advice; all financing is subject to lender approval, credit review and property underwriting, and no approval is guaranteed.
Terms depend on the asset, the leverage, the sponsor profile and the lender program on the day you apply. Broker licensing and closing rules vary by state. Commercial Mortgage Connection is a commercial mortgage brokerage, is paid when loans close, and sells the service described on this page. Equal Housing Opportunity. Call 888-656-9812 to discuss your scenario.
