Yield Maintenance and Prepayment

Estimated reading time: 1 minute

Chatham Financial describes a yield-maintenance estimate using discounted future payments minus principal, subject to a minimum premium. Actual loan provisions govern.

Fictional fixed-rate loan: $100,000 remains, with $5,000 due in one year and $105,000 in two years. Assume prepayment today, annual discounting, a 1% minimum premium and no accrued interest or fees.

At a stipulated 3% discount rate, the remaining payments’ present value is $5,000 ÷ 1.03 + $105,000 ÷ 1.03² = $103,826.94, rounded.

Subtract $100,000 principal: $3,826.94. This exceeds the $1,000 minimum, so principal plus premium totals $103,826.94. Adding principal to the full present value again would double count it.

At an alternative 6% discount rate, present value is $98,166.61. The negative difference does not create a refund: the assumed minimum applies, making principal plus premium $101,000.

These rates are not Treasury quotes. Obtain a dated lender calculation specifying remaining payments, discount convention, minimum and additional charges. A lower replacement-loan rate alone cannot establish refinancing savings; include the prepayment cost and new financing terms.