Income retention is a pre-tax penalty that guarantees a lender`s return on a loan. It compensates the lender for the amount of interest it would lose as a result of the down payment. If the borrower repays a loan, the lender cannot recover other interest. Obviously, this is a problem when interest rates go down after the lender has made the loan. This is because the lender gets a lower return (i.e. the interest rate) when it refinances the amount of the down payment. The formula for calculating a revenue retention premium is as follows: the only transaction tax related to income retention is a low processing burden for the credit service provider. On the other hand, the cost of deeasance is determined by the price of a portfolio of bonds sufficient to guarantee the remaining credit payments, plus transaction fees to several third parties. For borrowers, income retention is generally simpler and less tedious than deeasance. Suppose a borrower has a balance of $60,000 on a loan with 5% interest. The residual term of the loan is exactly five years or 60 months. If the borrower decides to repay the loan if the yield on 5-year Treasury bonds falls to 3%, the yield can be calculated in this way. Please use the Chatham machine to estimate your down payment costs.
The income management calculator is optimized for credits with monthly payments. For quarterly or semi-annual payments or unusual structures, please contact us. Income retention ensures that the lender receives a payment equal to the present value of its potential loss. The lower the interest rates, the greater the lender`s loss and hence the higher yield reduction penalty. However, there is no harm if interest rates rise after the lender has watered the loan. This is because the lender can renew the prepaid amount at a higher interest rate. However, income subsistence contracts often require a minimum penalty for the down payment, usually 1%, even if prices rise. The golden rule certainly applies here. Him with the gold, make the rules! Income retention bonuses are intended to make the advance indifferent to investors (payment of a debt or a loan in temperament before the official due date). In addition, it makes refinancing unattractive and unprofitable for borrowers.
Chatham`s online prepayment calculator was designed to give an estimated advance penalty for the loan indicated. It is designed to be used with fixed-rate debt denominated in U.S. bonds, based on the general assumption that the prepayment premium corresponds to the increase in the minimum fine, or the present value of all anticipated future debt payments (after the down payment date) that are depreciated on a cash return minus the repaid principal. Generally, the discount factor is the Treasury`s return on debt securities of the same tenor (i.e., the period up to maturity). The result is a sum of money you receive today, which is the value of future cash flows. This is due to the fact that the placement of the current value at the discount rate produces the corresponding interest. The amount of income retention is the present value multiplied by the loss of interest. Both income preservation and deeasance allow borrowers to reduce the value of the underlying real estate. From a legal and economic point of view, the two processes are fundamentally different. Income retention clauses are widespread for commercial mortgages and other CRE loans of $1 million or more. Lenders like them because the performance retention clause protects the lender from potential revenue losses.
This clause also makes it easier for lenders to sell securitization loans.