A step-down prepayment premium charges a fixed percentage of the principal you repay, and the percentage falls at set loan anniversaries, typically from 5% to 1%, until an open period near maturity when it drops to zero. Because the steps are fixed, the payoff date drives most of the cost: a sale that closes one month after a step-down anniversary can cost a full percentage point less than one that closes a month before it. This guide shows how to price that date before you sign a purchase agreement or a refinance commitment.
How a step-down schedule works
A step-down (also called a declining or graduated) premium is written as a string of percentages, one per loan year. Fannie Mae's declining prepayment premium term sheet lists these standard fixed-rate schedules:
| Loan term | Schedule by loan year | Lockout |
|---|---|---|
| 5 years | 5-4-3-2-1 | None |
| 7 years | 5-4-3-2-1 | 2 years |
| 10 years | 5-5-4-4-3-3-2-2-1-1 | None |
| 12 years | 5% years 1–4, stepping down to 1% to maturity | None |
| 15, 18 and 30 years | 5% years 1–7, stepping down to 1% to maturity | None |
The same term sheet lists 3-3-2-2-1-1-1 and 3-3-3-2-2-2-1-1-1-1 alternatives on some hybrid ARM loans, and it notes that prepayment is "generally permitted at any point in the loan term" under these schedules.
Three details in the loan documents decide what you actually pay:
- The base. Fannie Mae's Schedule 4 for a 10-year graduated premium (Form 6104.07) applies the percentage to "the amount of principal being prepaid." On a full payoff, that means the outstanding balance on the payoff date.
- The loan year. The rate changes on the anniversary of the closing date. Mark each anniversary in your hold model and note which ones carry a step.
- The open period. The same Fannie Mae form says no premium is payable on a prepayment made "on or after the last calendar day" of the fourth month before the month the loan matures. Freddie Mac's Optigo Conventional Small term sheet (dated 4/26) waives the premium in the last 90 days of the term.
Agency term sheets are published; bank, life company and debt fund loans set prepayment terms in each note. The arithmetic below applies to any schedule once you have the actual percentages and dates from your own documents.
Step-down compared with yield maintenance
Under yield maintenance, the premium is tied to rates. Fannie Mae's standard yield maintenance schedule (Form 6104.01) charges the greater of 1% of the principal prepaid or the principal prepaid multiplied by the difference between the loan's fixed rate and a Treasury-based yield rate, multiplied by a present value factor for the months left until the yield maintenance period ends. The yield rate is interpolated from Treasury constant maturities in the Federal Reserve's H.15 release. After the yield maintenance period ends, the premium is 1% until the open period in the last four months before maturity.
In practice:
- Yield maintenance moves with rates. When Treasuries sit well below your note rate, the premium is large. When they rise above it, the premium falls to the 1% floor.
- A step-down stays fixed. You know the percentage on every date for the life of the loan, which makes it easier to plan a sale or refinance.
- The option may be priced. Freddie Mac's Conventional Small term sheet uses yield maintenance until securitization, followed by a two-year lockout and then defeasance, as its standard provision, and says step-down and yield maintenance without defeasance "are available at an additional cost." Ask each lender how a step-down option changes the rate or fees.
For how yield maintenance and defeasance compare on securitized loans, see our guide to yield maintenance vs. defeasance.
A worked example: pricing the exit month by month
Take an illustrative 10-year fixed-rate multifamily loan (these are assumptions for the arithmetic, not a quote or an offer of terms):
- Original loan: $6,000,000
- Note rate: 6.25%, amortizing over 30 years
- Monthly payment: $36,943.03 ($443,316 a year)
- Prepayment schedule: 5-5-4-4-3-3-2-2-1-1, with no premium from the end of month 116
For comparison, the table also prices the same payoff under a yield maintenance schedule built on Fannie Mae's formula, assuming the yield maintenance period ends after month 114. To keep the arithmetic simple it holds the Treasury yield flat at 4.93%, the 5-year Treasury average for October 2026 according to FRED, and at a hypothetical 6.50%. An actual calculation would interpolate the yield for the remaining months.
| Payoff at end of month | Loan year | Balance | Step-down rate | Step-down premium | Yield maintenance at 4.93% | Yield maintenance at 6.50% |
|---|---|---|---|---|---|---|
| 12 | 1 | $5,929,692 | 5% | $296,485 | $533,007 | $59,297 |
| 24 | 2 | $5,854,862 | 5% | $292,743 | $474,943 | $58,549 |
| 36 | 3 | $5,775,219 | 4% | $231,009 | $415,345 | $57,752 |
| 47 | 4 | $5,697,720 | 4% | $227,909 | $359,449 | $56,977 |
| 49 | 5 | $5,683,148 | 3% | $170,494 | $349,163 | $56,831 |
| 60 | 5 | $5,600,234 | 3% | $168,007 | $291,961 | $56,002 |
| 84 | 7 | $5,402,015 | 2% | $108,040 | $163,951 | $54,020 |
| 96 | 8 | $5,293,244 | 2% | $105,865 | $98,699 | $52,932 |
| 108 | 9 | $5,177,477 | 1% | $51,775 | $51,775 | $51,775 |
| 116 | 10 | $5,096,190 | 0% (open) | $0 | $0 | $0 |
The table shows four patterns.
The anniversary matters more than amortization. Paying off at the end of month 47, the last month of loan year 4, costs $227,909. Waiting two months to month 49, the first month of loan year 5, costs $170,494. The two-month delay saves $57,414, while two months of amortization lowers the balance by only about $14,600.
Within a loan year, the cost barely moves. From month 49 to month 60 the premium falls by under $2,500, because only the balance changes. If a sale is going to close within a loan year, the exact week matters little to the premium.
With Treasuries below the coupon, yield maintenance costs more for most of the term. At a 4.93% yield rate, the 6.25% note carries a 1.32-point rate gap, and yield maintenance runs from about 1.5 to 2.0 times the step-down premium through month 84. By month 96 the two are close, and yield maintenance is slightly lower, because only 18 months of rate gap remain to be paid for.
If rates rise above the coupon, the comparison flips. At a 6.50% yield rate, yield maintenance falls to its 1% floor on every date before the open period, well below the step-down in the early years. The step-down schedule gives a known cost on every date, while yield maintenance can cost less if rates climb above the note rate before you exit.
Total exit cost: more than the premium
Beyond the premium, a payoff budget should include:
- Interest to the payoff date. Check whether the note allows payoff on any day or only on a payment date, and whether interest is charged through the end of the month.
- Notice requirements. Check whether your loan documents require advance written notice of a prepayment and how far ahead. A missed notice window can push the closing past an anniversary.
- Lender legal, payoff and release fees, plus any exit fee written into the loan agreement.
- Reserve balances. Check how the loan documents treat replacement, tax and insurance reserves at payoff; any balance returned to the borrower offsets part of the cost.
- The alternative of an assumption. A buyer may be able to assume the loan instead of paying it off, which avoids the premium but brings its own fees and approval process. Our article on CMBS loan assumption covers the conduit version.
Choosing a sale or refinance date
- Pull the schedule and three dates from the note: each loan anniversary, the start of the open period, and the notice deadline.
- Price the payoff in the months around each anniversary. On a step-down loan, compare the month before and the month after; at an anniversary where the rate steps down, the difference is roughly one percentage point of the balance.
- Compare the saving with the cost of waiting. A later closing can cost a buyer, a rate lock on new financing, or a tax deadline. On a refinance, compare the premium with the interest saved or the proceeds gained; our refinancing page outlines the options.
- On a new loan, choose the schedule against your business plan. If you expect to sell or refinance in year three to five, ask the lender to price both a step-down and yield maintenance and run the table above for each. If the plan calls for a sale or refinance within a year or two, compare those terms with a bridge loan, which carries different rate, term and prepayment provisions.
Agency, bank and life company terms differ by product and property type, and capital providers set the final schedule after underwriting. On a stabilized multifamily loan held for five to ten years, the prepayment schedule can change the cost of a sale by hundreds of thousands of dollars, as the example shows, so it belongs in the same comparison as the rate and proceeds.
Bottom line
On a step-down loan, the date you pay off decides most of the cost. In the example, closing in month 49 instead of month 47 saved $57,414, and waiting for the open period at month 116 eliminated the premium entirely. Before you set a sale or refinance timeline, put each loan anniversary and the open period on the calendar and price the payoff on either side of them, and when you choose terms on a new loan, run the same table for step-down and yield maintenance at current Treasury yields.