Yield maintenance is a financial concept used in the mortgage industry to calculate the prepayment penalty a borrower would need to pay if they decide to pay off their loan before its maturity date. The essence of this calculation is to compensate the lender for the lost interest payments that would have been made had the loan continued to its scheduled conclusion.
The Fannie Mae Yield Maintenance Calculator employs a specific formula to estimate these costs, providing borrowers with a clear picture of the financial implications of their decision to prepay. By inputting the necessary data, users can quickly receive an accurate estimate of their prepayment penalty. Which is crucial for making cost-effective prepayment decisions.
Formula of Fannie Mae Yield Maintenance Calculator
The formula for calculating yield maintenance is as follows:
Yield Maintenance = Present Value (PV) of Remaining Payments on the Mortgage x (Interest Rate - Treasury Yield)
Here’s a breakdown of the variables:
- Present Value (PV) of Remaining Payments: This represents the current value of all the remaining interest payments you would make if you held the loan until maturity.
- Interest Rate: This is the fixed interest rate you pay on your mortgage.
- Treasury Yield: This is the interest rate on a comparable U.S. Treasury security with a maturity date close to the remaining term of your mortgage.
General Terms Table
For the convenience of our readers. We include a table of general terms that commonly appear in discussions about yield maintenance. This table aims to provide a quick reference that can enhance understanding without the need for complex calculations.
| Term | Definition |
|---|---|
| Present Value (PV) | The current worth of a future sum of money or stream of cash flows given a specified rate of return. |
| Interest Rate | The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. |
| Treasury Yield | The return on investment, expressed as a percentage, on the U.S. government’s debt obligations (Treasury securities). |
| Yield Maintenance | A prepayment premium that allows investors to receive the same yield as if the borrower made all scheduled mortgage payments until loan maturity. |
Example of Fannie Mae Yield Maintenance Calculator
Consider a borrower who has a $1,000,000 loan with a fixed interest rate of 5% and 10 years remaining on their loan term. If the current Treasury yield for a security with a comparable maturity is 2%. The present value of the remaining payments is calculate to be $920,000, the yield maintenance would be calculate as follows:
Yield Maintenance = $920,000 x (0.05 - 0.02) = $27,600
This means the borrower would need to pay a prepayment penalty of $27,600 to compensate the lender for the loss of interest payments.
Most Common FAQs
Yield maintenance is a type of prepayment penalty that borrowers pay to lenders to compensate for the interest payments lost due to early loan payoff. It ensures the lender receives the same yield as if the loan had reached maturity.
The interest rate directly influences the yield maintenance calculation. A higher interest rate means a higher prepayment penalty. As the difference between the mortgage interest rate and the Treasury yield increases.
The Treasury yield is use as a benchmark for the safe, risk-free rate of return in the financial markets. It represents what the lender could earn from the safest investment option if the loan is prepaid. Ensuring a fair compensation for the lender’s loss of interest payments.
