In one sentence
A prepayment premium designed to make the lender whole for the interest it loses when a fixed-rate loan pays off early.
The longer version
The formula present-values the remaining payments at a reference rate, usually a Treasury matching the remaining term, and charges the difference. When market rates sit below the note rate, the premium is real money.
Life companies and agencies favor yield maintenance; CMBS favors defeasance. Borrowers model both before choosing a lender, because exit cost is part of the price of the loan.
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