Prepayment Penalties in Relation to the Freddie Mac Optigo SBL Program
Prepayment penalties are designed to compensate a lender when a borrower decides to pay off their loan early, as the lender will be losing a significant amount of money in future interest payments. Prepayment penalties can be structured in a variety of different ways, but are usually larger at the beginning of the term of a loan, and grow smaller over time. All Freddie Mac Multifamily loans carry prepayment penalties, but each loan has slightly different parameters. In regards to the Freddie Mac Small Balance Loan program, borrowers can choose between yield maintenance or a step-down prepayment penalty. Yield maintenance reimburses a lender (or the investors, after a loan has been securitized) for the amount of interest that will not be paid by the borrower as a result of prepayment, while a step down prepayment penalty charges borrowers a percentage of the unpaid principal balance (UPB), which “steps down” by a certain amount each year.