Yield maintenance vs defeasance: which costs more when you sell?
Both exist to give the lender the interest it expected, so both cost more when Treasury yields are below your note rate and less when they are above it. Yield maintenance is a cash payment, usually with a 1% of principal floor. Defeasance replaces the loan's payments with a portfolio of Treasuries, has no 1% floor and adds third-party fees. With the 10-year Treasury at 5.24% on Oct. 1, 2026, an older low-rate note may cost little to retire, while a young note written at today's rates is the expensive case, and gets more expensive if yields fall.
Buyer cash → Assignment Co. → fixed annuity → You, on schedule
Hans Goldstein structures installment sales for sellers and works alongside their CPAs and brokers. Email hans@goldsteinco.net or call 213-414-2808.
How does yield maintenance work?
Yield maintenance makes the lender whole in cash. As J.P. Morgan describes it, the payment is the greater of:
- 1% of the principal, or
- the present value of the remaining payments times the gap between the note rate and the Treasury yield.
In plain terms: the lender gets your loan money back early and can reinvest it at the Treasury yield. If that yield is lower than your note rate, the lender loses the difference every month until maturity, and you pay today's value of that loss. If the Treasury yield is above your note rate, there is no loss to pay, and the 1% floor usually applies.
The simple version of the formula, for an interest-only loan:
Yield maintenance = PV of (note rate minus Treasury yield) x balance / 12, every month to maturity, discounted at the Treasury yield. Then take the larger of that and 1% of the balance.
Notes differ in the details: which Treasury (usually one matched to the remaining term), whether a spread is added to the discount rate, and whether the calculation runs to maturity or to the start of the open period. Your note controls.
How does defeasance work?
With defeasance you don't pay the loan off. You replace its collateral. You buy a portfolio of Treasuries or other government securities whose payments match every remaining payment on your loan, including the balloon. The securities go to a successor borrower, the lender keeps receiving the same payments, and your property is released so it can sell free of the lien.
What is the tax bill on your property sale going to be?
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Your cost is the price of that portfolio, plus third-party fees (typically a defeasance consultant, legal counsel, an accountant's verification and the successor borrower). If the portfolio costs more than your loan balance, the difference is the defeasance premium. Per J.P. Morgan, rising rates make defeasance cheaper because fewer securities are needed to produce the same payments, and falling rates make it more expensive. There is no 1% floor. When Treasury yields are above your note rate, the portfolio can cost less than the loan balance.
Worked example: the same loan, three Treasury yields
All figures below are illustrative. The loan is sized like the one on a deal on my desk ($2.1M, taken out seven months before the sale), but the rate and terms are assumptions for the math, not that loan's terms.
Assumptions: $2.1M balance, interest-only, 10-year term, seven months old (113 months left), illustrative note rate 6.75%. One flat Treasury yield is used for discounting, monthly compounding, no open period, and no fees. In this simplified setup, the yield maintenance amount and the defeasance premium come out the same, because both are the present value of the same rate gap. In real life they differ, for the reasons in the next section.
How the first row is built: the monthly gap is (6.75% minus 5.24%) x $2.1M / 12 = $2,642.50. The present value of $2,642.50 a month for 113 months, discounted at 5.24% a year compounded monthly, is about $235,294. That is above the 1% floor of $21,000, so it is the amount due.
Why 3.75%? It is the level where respondents to the CBRE U.S. Cap Rate Survey H1 2026 said, at the median, that the 10-year must fall for activity to pick up. If yields fall that far, the cost on this young loan roughly doubles.
Now the opposite case: an older note written at an illustrative 4.00%, with $2.1M outstanding and 36 months left, again at a 5.24% Treasury yield.
The defeasance portfolio is cheaper than the balance because Treasuries yielding 5.24% need fewer dollars to produce a 4.00% loan's payments. After fees, defeasance may come out cheaper than yield maintenance on this loan. That is the 2026 pattern in one table: older low-rate notes can be cheap to retire, young high-rate notes are not.
Why do yield maintenance and defeasance differ in practice?
- The floor. Yield maintenance usually has a 1% minimum. Defeasance does not, so it wins when rates are well above the note rate.
- Fees. Defeasance carries third-party costs that yield maintenance does not. On a small loan they can outweigh a small rate benefit.
- Real securities. Defeasance buys actual bonds at market prices across the yield curve, not one flat rate.
- Timing. Defeasance takes coordination with the servicer, consultant and counsel, and needs to be scheduled with your closing.
- Your note decides. You usually don't get to pick. The Freddie Mac fixed-rate term sheet shows the pattern: "Yield maintenance until securitized followed by 2-year lock-out; defeasance thereafter. No prepayment premium for final 90 days." So depending on when you sell, the same loan can be yield maintenance, locked out, or defeasance.
What does the market look like as of October 2026?
- Treasury yields moved up fast. The 10-year was 5.24% on Oct. 1, 2026, in a 5.17% to 5.29% range from Sept. 25 to Oct. 1 (FRED, DGS10). CBRE wrote it was "near 4.6% as of mid-July." That is a rise of roughly six tenths of a point, which lowers the cost of retiring loans written below today's yields.
- The Fed raised rates. The target range went to 3.75% to 4.00% after a 0.25 point increase at the Sept. 16, 2026 meeting (Federal Reserve FOMC statement).
- New loans price higher. As of Oct. 1, 2026, Northmarq's rates and spreads quoted 10-year Freddie Mac loans at 6.30% to 6.45% and 10-year CMBS at 7.00% to 7.50%. Loans written at those rates are the ones with the most to lose if yields fall.
What does this mean for a 1031 or a structured sale?
The prepayment cost is the same whichever tax path you choose, because the old loan is paid off or defeased at closing either way. In a 1031, the cost reduces the equity that reaches your qualified intermediary, and the replacement still needs at least as much debt as was relieved, or added cash, for full deferral. How the cost is treated for tax is a question for your CPA: a prepayment premium is often treated as interest rather than a selling expense, and paying non-closing costs from exchange funds can create boot. Settle it with your CPA and QI before closing.
A structured installment sale also pays off the old loan at closing, premium included, and that payoff is a year-one payment taxed at the sale's gross profit ratio. What it removes is the new loan: you don't take on a fresh note at today's rates with a fresh prepayment schedule. The buyer pays in full at closing, an assignment company funds your payments with a fixed annuity from an insurer, and you report the rest of the gain under IRC §453 as payments arrive. You are not the lender. The trade-offs: payments are locked once set, they depend on the assignment company and the insurer behind it, there is no published IRS ruling on this specific structure so your CPA should review it, a commission of about 4% of the amount structured is built into the pricing, and interest in each payment is ordinary income.
Who to call first: your loan servicer for a payoff or prepayment quote with the calculation shown, and, if your note calls for defeasance, a defeasance consultant for a cost estimate. Ask both how long the quote holds, since it moves with Treasury yields daily. Then run both paths with your own numbers in the advanced calculator, or send Hans the deal and he will lay them side by side for your CPA.
Frequently asked
Q: Can I choose between yield maintenance and defeasance? A: Usually not. The note sets the method, and it can change over the loan's life, as the Freddie Mac term sheet shows. Read the prepayment section and ask the servicer which applies on your closing date.
Q: Why is my yield maintenance only 1%? A: Because Treasury yields are at or above your note rate, so the lender loses nothing by being repaid early. The 1% floor is the minimum. This is common in 2026 for notes written when rates were lower.
Q: Can defeasance cost less than my loan balance? A: It can, when Treasury yields are well above your note rate, because fewer securities are needed to cover the payments. Fees still apply, and the result depends on the actual bond prices on the day.
Q: Will a falling 10-year make my penalty bigger? A: For a loan written at today's higher rates, yes. In the illustrative example, a drop from 5.24% to 3.75% takes the cost from about $235,294 to about $499,168.
Q: Does a 1031 exchange avoid yield maintenance or defeasance? A: No. The exchange defers tax on the gain. The loan is still paid off or defeased at closing under the note's terms. See prepayment penalty when selling for a 1031.
What should you read or run next?
- Advanced calculator
- 1031 boot calculator
- Prepayment penalty when selling for a 1031
- Negative leverage in a 1031 exchange
- 1031 exchange with high interest rates in 2026
- What is taxed in year one of a structured sale?
- For brokers
Who wrote this?
Find out what your property sale tax bill actually is, and what you can do about it
No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
Send me the sale price and roughly what you paid. Within one business day I’ll come back with the number you’re actually looking at on a property sale and whether a structured installment sale can push it down. If it can’t, I’ll tell you that just as plainly.
You'll also get the plain-English Seller's Guide to §453: the math, the alternatives, and the cases where it does not work.
📞 Hans Goldstein · 213-414-2808 · CA Insurance License #4273294 · Independent §453 specialist · Goldstein & Co. LLC
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
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