Buying, selling and operating apartments in Portland

Loan Pre-Payments | 17 April 2010

Pre-payment Options – Have your finance person explain the basic terms of your loan which may include:Lockout – The period of time when you may not pre-pay any amount toward your debt after origination.

Standard Pre-Pays – Historically most loans used standard pre-pays and these are preferable to defeasance or yield maintenance arrangements – Even if it means paying a premium. For example, in the case of a 5-4-3-2-1 prepay during the first year if you paid off the loan you would pay an additional 5% of the unpaid balance, during the 2nd year you pay 4% and so on.

Defeasance / yield maintenance – If your originating bank sells your loan, it may become combined with other loans and sold as part of a portfolio. To be sold, this portfolio needs to have a predictable yield. For prepays (if allowed), a bank may require you to replace your loan with more secure debt. This can mean a much higher cost to you than a standard pre-pay and make your property less marketable.

There are several websites that offer calculators to help you determine what penalty is involved. To find them, go to a web search engine and search for the terms “defeasance” and “calculator”. These loans are difficult to pre-pay since you need to find the proper signing authority for whoever ultimately holds your debt.