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Multifamily Prepayment Penalties: Yield Maintenance, Defeasance and Step-Down
How prepayment penalties work on 5+ unit apartment loans—yield maintenance, defeasance and step-down premiums at Fannie Mae, Freddie Mac, HUD, banks and CMBS, with a worked example and how to price the exit cost.
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By Multi-Family USA Editorial Team · Reviewed by Scott Dillingham · Published · Updated · 13 min read
What a multifamily prepayment penalty is for
A fixed-rate multifamily loan is priced on the assumption that the lender or investor will earn that coupon until maturity. If you repay early, they have to reinvest the money, perhaps at a lower rate. Prepayment provisions put a price on that. They give you a way out of the loan, but at a cost that is written into the note when you sign.
For you, the practical consequence is that the prepayment structure is part of the price of the loan, as much as the rate. Choose it with your exit plan in mind, and model the cost with the yield maintenance calculator before you accept a term sheet.
This guide covers the four structures you will see on 5+ unit loans, how the main programs use them, and how to estimate the cost of leaving early. For the loan programs themselves, see agency stabilized loans, Freddie Mac Optigo, HUD 223(f), CMBS loans and bank loans.
The four structures
| Structure | How it works | Typical program | What it costs you |
|---|---|---|---|
| Yield maintenance | Premium that compensates the investor for the rate difference between your coupon and a Treasury-based reinvestment rate, with a floor | Fannie Mae, Freddie Mac fixed, supplementals | Large when rates have fallen; small (floor only) when rates have risen |
| Defeasance | You swap the property as collateral for securities that cover the remaining payments | Freddie Mac fixed-rate securitized loans, CMBS | Cost of buying the securities, plus defeasance and legal fees |
| Step-down (declining) premium | Fixed percentage of the balance that falls over time, such as 5-4-3-2-1 | Fannie Mae variable-rate loans, Freddie Mac floating, many bank loans | Predictable; never worse than the schedule percent |
| Lockout then open | No prepayment allowed for a period, then penalty-free | Early years of many structures; HUD’s first five years | Cannot exit at any price during the lockout |
Most real loans combine them. A typical agency fixed-rate loan has yield maintenance for most of the term, a 1% premium for a short window and then an open period with no premium before maturity. The sections below give the specifics from the agencies’ own documents.
Terms such as yield maintenance and defeasance are defined in the glossary.
Yield maintenance
How the formula works
Freddie Mac’s November 2024 prepayment report describes yield maintenance as having two parts: the unpaid balance and a premium, with the premium typically determined by the present value of the remaining loan payments, discounted at the current yield on the U.S. Treasury that matures closest to the loan’s maturity date. Put simply, the premium grows with the gap between your note rate and the Treasury yield, and with the time left in the yield maintenance period. The premium measures lost interest, so it is largest in the early years of a long loan after rates have dropped.
The exact definition is in your note. Spreads over Treasuries, discounting conventions and the date the Treasury is read all vary, so treat any calculator, including ours, as an estimate.
The agency floor
On Fannie Mae loans, the Multifamily Guide (Section 213.02A) says the loan documents generally require a prepayment premium equal to the greater of 1% of the unpaid balance or yield maintenance, for a prepayment before the Yield Maintenance Period End Date. Freddie Mac’s K-Deal investor presentation says the same for its yield maintenance loans: the premium is the greater of 1% of the principal prepaid or its standard formula, and a prepayment made after the yield maintenance period but before the window period starts carries a 1% premium.
That floor matters when rates have risen. If your coupon is lower than current Treasury yields, the formula produces zero, but you still owe the 1% minimum.
Open windows
Freddie Mac’s fixed-rate and floating-rate sheets both say there is no prepayment premium for the final 90 days. Fannie Mae’s loan documents define a Yield Maintenance Period End Date, the last day on which yield maintenance is owed for a voluntary prepayment, and Fannie Mae’s DUS term sheet as republished by Lument describes flexible options including yield maintenance and declining premiums. Confirm the dates in your term sheet, because a few months can decide whether a sale or refinance costs 1% or nothing.
Defeasance
Defeasance is the main alternative to yield maintenance on securitized loans. Freddie Mac’s K-Deal investor presentation describes it this way: voluntary prepayments are prohibited during the defeasance period, but the real estate collateral may be replaced with securities that generate cash flows sufficient to make the scheduled loan payments as they come due, including payment in full at maturity. The defeasance period is typically preceded by a lockout and followed by an open window with no premium.
On Freddie Mac fixed-rate loans, the sheet says: yield maintenance until securitized, then a 2-year lockout following securitization, then defeasance, with no premium for the final 90 days. Yield maintenance without defeasance is available for securitized loans at an additional cost. Freddie Mac’s November 2024 prepayment report says about 95% of its fixed-rate business uses the lockout-defeasance-open structure and about 5% uses yield maintenance followed by a 1% premium and an open period.
Defeasance costs are not a fixed formula. You must buy the securities, which depends on current Treasury prices, and you pay the servicer’s and counsel’s defeasance fees. When rates are low, securities are expensive and defeasance costs more. Plan for both the securities cost and the fees, and ask your lender for a recent defeasance quote on a similar loan.
Step-down premiums
A step-down premium is a fixed percentage of the balance that declines over time. Freddie Mac’s investor presentation gives the 5-4-3-2-1 example: 5% of the principal prepaid for a set period, then 4%, then 3%, and so on. The advantage is certainty, because you know the cost in advance and do not depend on Treasury yields.
Freddie Mac’s floating-rate sheet lists four options, each with no premium in the final 90 days:
| Year | Option 1 | Option 2 | Option 3 | Option 4 (10-year capped only) |
|---|---|---|---|---|
| 1 | Locked out | 3% | 5% | 7% |
| 2 | 1% | 2% | 4% | 6% |
| 3 | 1% | 1% | 3% | 5% |
| 4 | 1% | 1% | 2% | 4% |
| 5 | 1% | 1% | 1% | 3% |
| 6 | 1% | 1% | 1% | 2% |
| 7 and later | 1% | 1% | 1% | 1% |
Lument’s republished Fannie Mae DUS conventional term sheet lists yield maintenance for fixed-rate loans and a declining prepayment premium for variable-rate loans.
Program by program
| Program | Prepayment structure | Source |
|---|---|---|
| Fannie Mae fixed-rate | Yield maintenance; greater of 1% of balance or formula; 1% for a window after yield maintenance; open before maturity | Fannie Mae Multifamily Guide, Section 213.02A |
| Fannie Mae variable-rate | Declining premium | Fannie Mae term sheets via Lument |
| Fannie Mae supplemental | Yield maintenance (fixed) or graduated (variable); end date need not match the senior loan | Fannie Mae supplemental term sheet via Lument |
| Freddie Mac fixed-rate | Yield maintenance until securitized, 2-year lockout, defeasance; no premium in last 90 days | Optigo Fixed-Rate Loans sheet, 4/26 |
| Freddie Mac floating-rate | Four step-down options; none in last 90 days | Optigo Floating-Rate Loan sheet, 4/26 |
| Freddie Mac supplemental | Yield maintenance (fixed) | Optigo Supplemental Loan sheet, 11/25 |
| HUD 223(f) | Five-year statutory bar after endorsement, schedule in the note afterward | See HUD 223(f) |
| CMBS conduit | Commonly a lockout followed by defeasance; varies by issuer, so confirm in the term sheet | See CMBS loans |
| Bank loans | Negotiated in the loan documents; step-down schedules are a common form | See bank loans |
For anything outside the agency documents above, the structure varies by lender. Ask for it in writing.
Worked example (hypothetical numbers)
The numbers below are round and invented for a $5,000,000 fixed-rate loan. They use the same monthly rate-differential method as our yield maintenance calculator, with a 1% floor, and are only an illustration, because your note defines the real formula.
| Scenario | Assumptions | Estimated premium |
|---|---|---|
| Rates have fallen | 6.00% note, 4.00% Treasury, 7 years left, 3-month open window | about $591,000 (11.8%) |
| Same loan, 3 years left | Same rates, 36 months to maturity | about $260,000 (5.2%) |
| Rates have risen | 6.00% note, 5.50% Treasury, 7 years left | about $141,000 (2.8%) |
| Coupon below Treasury | 4.00% note, 5.00% Treasury | $50,000 (1% floor) |
| Step-down alternative | 5-4-3-2-1 schedule, prepaid in year 3 | $150,000 (3%) |
Two lessons. First, the same loan can cost between $50,000 and nearly $600,000 to repay depending only on rates and timing, which is why you should compare structures before you borrow, not when you sell. Second, step-downs cost more than yield maintenance in some environments and less in others. A step-down is a good deal when you expect rates to fall and a poor one when they rise, since yield maintenance would have fallen to the floor.
How to choose a structure
- Write down your exit plan. If you might sell or refinance within five years, favor structures with an early step-down or a shorter yield maintenance period. If you will hold to maturity, take the lowest rate.
- Price the trade-off. Ask for quotes with at least two prepayment structures and compare the rate difference with the modeled exit cost in the yield maintenance calculator.
- Check assumability. Many agency loans are assumable, subject to review of the new borrower. If a buyer can take over the loan, the premium may not apply at all. Fannie Mae says its loans are typically assumable, subject to review and approval of the new borrower’s financial capacity and experience.
- Check involuntary events. Ask how the note treats casualty, condemnation and other involuntary payoffs.
- Add the costs to your model. Use the multifamily mortgage calculator and the closing cost calculator, and see our rate risk guide for refinance planning.
- Get a second view. Send the scenario through our deal review and we can match it with lenders that offer the structures you want, or see current rates for context.
Interest-only and supplemental interactions
Prepayment premiums are calculated on the unpaid balance. On an interest-only loan the balance does not fall during the IO period, so the premium stays higher in dollars. A supplemental loan has its own prepayment schedule, and Fannie Mae allows the premium period end date of a supplemental to differ from that of the senior loan, so check each note separately.
Questions to ask your lender
- What are the exact prepayment provisions: lockout, yield maintenance or defeasance period, step-down schedule and open window?
- How is the yield maintenance formula defined, including the Treasury used and any spread?
- What is the minimum premium?
- What will it cost to defease, including fees?
- Is the loan assumable, and on what conditions?
- Are there partial prepayment rights or release provisions?
- Can I buy out the premium structure for a higher rate, or the reverse?
Sources
- Fannie Mae, Multifamily Guide, Section 213.02A: Calculation of Total Prepayment Premium, accessed October 8, 2026.
- Fannie Mae supplemental loan and DUS conventional term sheets as published by Lument and Lument, accessed October 8, 2026.
- Freddie Mac, Optigo Fixed-Rate Loans product sheet, 4/26 and Optigo Floating-Rate Loan product sheet, 4/26, accessed October 8, 2026.
- Freddie Mac, Floating- and Fixed-Rate Loan Prepayments, November 2024, accessed October 8, 2026.
- Freddie Mac, K-Deal Program Overview Investor Presentation as of June 30, 2026, accessed October 8, 2026.
- HUD, Sections 207/223(f) program description and the MAP Guide, Handbook 4430.G, Section 3.7.10.
Individual notes control. This guide is educational, is not an offer or commitment to lend, and should be combined with advice from your lender, attorney and tax adviser. Multi-Family USA is a lender-matching service operated by LendCity America and does not originate loans.
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