Overview

Mortgage pre-payments are events, very much like loan default. As such, the same types of models that can be applied to loan default can be used to model pre-payments.

• Bernoulli Probabily of Prepayment
• Survival Analysis

Factors Influencing Probability of Pre-Payment

• Age - as loans get older, the borrower is more likely to have undergone some life change, which may lead them to pre-pay the loan. This may include, the borrower moving, or deciding to upgrade or downgrade their residence.
• Current Interest Rates Relative to Loan Rate - when the current interest drops significantly below the interest rate charged on the mortgage, the borrower is incentivized to re-finance the mortgage, which leads to pre-payment.