Modeling Mortgage Pre-Payments
Overview
Most mortgages in the United States are pre-payable. That is, they give the borrower the
option
to off the loan prior to its stated maturity.
Most pre-payments are total in nature, that is, they pay off the entire balance of the loan, so that the loan
terminates. (i.e. no further interest payments are required) This typically happens when interest rates go
below the rate of the mortgage, and the borrower enters into a new mortgage at the lower rate, using the
proceeds to pay off the original mortgage.
Less frequently, some borrowers will make partial payments, which is reduced to reduce the principal amount.
Topics
