Defeasance Calculator

FAQs

What is a defeasance calculator? A defeasance calculator is a tool used to calculate the cost and savings associated with defeasance, which is a process used in commercial real estate finance to release a property from a mortgage lien. It helps borrowers and investors assess the financial implications of defeasance as an alternative to paying a prepayment penalty.

How does a loan defeasance work? Loan defeasance is a process in which a borrower substitutes the original collateral (usually the property) for a portfolio of U.S. government securities. The income from these securities is then used to make the remaining mortgage payments, effectively releasing the property from the mortgage lien.

What is the defeasance cost? The defeasance cost includes various expenses related to the defeasance process, such as legal fees, administrative expenses, the cost of purchasing the U.S. government securities portfolio, and any prepayment penalty associated with the original loan.

What is the difference between yield maintenance and defeasance? Yield maintenance and defeasance are two methods to handle prepayment of a commercial mortgage. Yield maintenance requires the borrower to make a lump-sum payment to compensate the lender for the lost interest income. Defeasance, on the other hand, involves substituting the collateral with U.S. government securities to maintain the lender’s expected yield.

Why use defeasance? Defeasance is used as an alternative to paying a prepayment penalty when a borrower wants to sell or refinance a property before the mortgage term is complete. It allows the borrower to release the property from the mortgage lien while avoiding a significant upfront penalty payment.

What is an example of defeasance in real estate? An example of defeasance in real estate is when a commercial property owner wants to sell the property before the mortgage term ends. Instead of paying a prepayment penalty, the owner chooses defeasance, substituting the property as collateral with U.S. government securities to release it from the mortgage.

How to calculate 80% loan to value? Loan-to-value (LTV) ratio is calculated by dividing the loan amount by the property’s appraised value. For example, if a property’s appraised value is $500,000, and the loan amount is $400,000, the LTV ratio would be 80% (400,000 / 500,000 = 0.8 or 80%).

What does defeased debt mean? Defeased debt refers to a debt that has been paid off or released from the borrower’s liability through defeasance. The borrower substitutes the original collateral with a portfolio of securities to ensure the lender receives the expected yield.

What are the types of defeasance? The primary types of defeasance are “legal defeasance” and “in-substance defeasance.” In legal defeasance, the borrower is entirely released from the debt obligation. In in-substance defeasance, the borrower remains liable for the debt, but the lender’s recourse shifts to the securities.

Are defeasance fees tax deductible? Defeasance fees are generally not tax-deductible for the borrower. These costs are typically considered capital expenses related to a real estate transaction and are not treated as regular business expenses.

What does call defeased mean? Call defeased means that the debt has been defeased, and the borrower has substituted the original collateral with securities. As a result, the lender no longer has the right to “call” or demand repayment of the loan before its original maturity date.

Who would most benefit from a defeasance clause in a mortgage? A defeasance clause in a mortgage benefits the borrower who may want to sell or refinance the property before the mortgage term is complete without incurring a prepayment penalty. It provides an alternative exit strategy without facing significant upfront costs.

What is a defeasance in a mortgage? Defeasance in a mortgage is a process where the borrower substitutes the original collateral (usually the property) with a portfolio of U.S. government securities to release the property from the mortgage lien and avoid a prepayment penalty.

What is the difference between prepayment and defeasance? Prepayment refers to paying off a loan or mortgage before its scheduled maturity date. Defeasance is a specific type of prepayment that involves substituting the original collateral with securities to release the property from the mortgage lien.

What are the three types of yield? The three types of yield are “current yield,” which measures the income generated by an investment as a percentage of its current market price, “yield to maturity,” which calculates the total return anticipated on a bond if held until its maturity date, and “yield to call,” which measures the return if a bond is called before maturity.

What does a defeasance clause in a mortgage require the mortgagee to execute? A defeasance clause in a mortgage requires the mortgagee (the lender) to accept a substitution of the original collateral with a portfolio of U.S. government securities as an alternative to the borrower paying a prepayment penalty.

How does defeasance work on CMBS loan? In the case of a CMBS (Commercial Mortgage-Backed Securities) loan, defeasance works similarly to other commercial loans. The borrower substitutes the original collateral with U.S. government securities to release the property from the mortgage lien.

What is a synonym for the word defeasance? A synonym for defeasance is “prepayment,” as both terms refer to paying off a loan or debt before its scheduled maturity date.

What is a defeasance premium? The defeasance premium refers to the difference between the original interest rate on the mortgage and the lower interest rate on the U.S. government securities used in the defeasance process. This premium is the extra cost borne by the borrower to defease the loan.

What is the instrument of defeasance? The “instrument of defeasance” refers to the legal documentation that outlines the terms of the defeasance process, including the substitution of the original collateral with U.S. government securities.

What is a defeasance escrow? A defeasance escrow is an account where the borrower places the funds required for the defeasance process. This escrow account is used to purchase the U.S. government securities that will be used to defease the loan.

What does a defeasance clause in a mortgage provide for quizlet? A defeasance clause in a mortgage provides an alternative to the borrower for paying a prepayment penalty. It allows the borrower to defease the loan by substituting the original collateral with U.S. government securities to release the property from the mortgage lien.

At what point does PMI go away? Private Mortgage Insurance (PMI) typically goes away when the loan-to-value (LTV) ratio reaches 78%. This can occur through a combination of paying down the loan principal and property appreciation.

What is the highest loan-to-value mortgage? The highest loan-to-value mortgage is a loan where the mortgage amount is a high percentage of the property’s appraised value. The specific LTV limit can vary based on the lender’s risk tolerance and the type of property being financed.

What is 90% loan-to-value? A 90% loan-to-value (LTV) ratio means that the borrower is financing 90% of the property’s appraised value through the mortgage, while the remaining 10% is the down payment or equity in the property.

What is notice of defeasance? A notice of defeasance is a formal communication sent by the borrower to the lender, informing them of the intent to defease the loan. This notice typically includes details about the securities to be used and the defeasance date.

What is the defeasance date? The defeasance date is the specific date when the borrower completes the defeasance process, and the original collateral is replaced with the U.S. government securities.

What part of a mortgage is tax deductible? In the United States, the interest paid on a mortgage is generally tax-deductible for homeowners who itemize their deductions. This deduction can provide a significant tax benefit for homeowners.

What expenses can be deducted on an estate return? On an estate tax return, various expenses related to administering the estate may be deductible. These expenses can include legal fees, executor fees, and certain administrative costs. It’s essential to consult a tax professional for guidance specific to your situation.

What penalties are not tax deductible? Generally, penalties, fines, and illegal activities’ costs are not tax-deductible. For example, penalties for late payment of taxes or fines for breaking the law are not eligible for deduction.

How long does defeasance take? The timeframe for completing defeasance can vary depending on the complexity of the transaction and the parties involved. On average, defeasance can take several weeks to complete, from the initial notice to the actual defeasance date.

What is a partial defeasance? A partial defeasance is a defeasance process in which the borrower substitutes only a portion of the original collateral with U.S. government securities. This can be done when releasing a part of the property from the mortgage lien while retaining the lien on the remaining portion.

Why buy calls in the money? Investors may choose to buy calls “in the money” to have a higher probability of profiting from the option. In-the-money calls have an intrinsic value, making them more expensive but providing immediate exposure to the underlying asset’s price movement.

What is a most favored lender clause? A most favored lender clause is a provision in a loan agreement that grants the lender certain rights or benefits, making them the preferred lender compared to other creditors or lenders.

Who benefits from high mortgage rates? Lenders typically benefit from high mortgage rates, as they can charge borrowers higher interest rates, resulting in higher profits.

What is it called when a lender charges a borrower more than the highest allowable interest rate? Charging a borrower more than the highest allowable interest rate is called usury. Usury laws vary by jurisdiction and aim to protect borrowers from excessively high interest rates.