Unpaid Principal Balance and Commercial Property Loans
In commercial real estate finance, unpaid principal balance, or UPB, is the amount of a loan’s principal balance that has not yet been paid back to a lender. To calculate the UPB, a borrower cannot simply subtract their current mortgage payments from the initial loan amount; since they have also been paying interest, they will have to add this into their calculations. The formula for UPB is below:
Unpaid Principal Balance = Original Loan Amount - Total Principal and Interest Payments to Date + Total Interest Payments to Date
For instance, if a borrower has taken out a $2 million commercial property loan, and has made $600,000 of payments, $400,000 of which are interest, the UPB of that loan would be $1.8 million.
UBP and Prepayment Penalties
Because most commercial property loans come with prepayment penalties, a borrower cannot simply pay the unpaid principal balance and step away from their mortgage. Instead, they will have to pay both the UPB and a prepayment penalty, which compensates a lender for the interest payments they will forgo as a result of the borrower paying their loan off early. In most cases, the prepayment penalty is based off of the unpaid principal balance, not the original loan balance, as this would be unfair for borrowers.
For instance, UPB is used to calculate the amount of money a borrower will have to pay when they prepay a loan using yield maintenance. This is because the borrower has already paid the interest on the amount of the principal they have paid off, and interest on the UPB represents the exact amount future interest payments the lender will lose when the borrower prepays their loan.