Fannie Mae Yield Maintenance
Yield Maintenance ("YM") is a prepayment fee provision often found in Fannie Mae or Freddie Mac loans. This structure is designed to reduce the loss of interest income to the lender. In general, if the benchmark rate is higher than the loan rate there is no YM penalty; if the benchmark is significantly lower than the loan rate there will be a large penalty.
|1- Loan Terms|
|Loan Balance:||$ at prepayment date|
|Loan Interest Rate:||%|
|Yield Maintenance End Date:||usually 6 months prior to maturity date|
Prepayment penalty due: ...
Strategies for working with Yield Maintenance:
Buying a property: mortgages with YM are generally cheaper than those without. If you believe interest rates will rise or you plan to hold the property until the loan matures then YM may be a good choice. If not, consider loans with a step-down prepayment penalty.
At what interest rate does it become cheaper to pay YM instead of a fixed penalty amount?
|Prepayment penalty:||% on the above prepayment date|
Selling a property: if the YM penalty is very large see if the buyer can assume the existing mortgage. If the buyer wants more leverage see if a supplemental loan is available.
Refinancing: if YM makes it too expensive to refinance the existing mortgage consider a supplemental loan.
For more information on the Yield Maintenance calculation see this Fannie Mae primer.