How Partial Mortgage Prepayments Affect Scheduled Principal and CPR
Summary
The document clarifies the distinction between scheduled principal payments and prepayments in a fixed-rate mortgage. CPR, or conditional prepayment rate, is described as the prepayment rate in excess of scheduled principal. The question concerns a borrower who makes a partial prepayment after following the original amortization schedule, and whether the remaining payments are recalculated.
The answer says a standard mortgage’s monthly payment generally remains as set at origination after a partial prepayment. Because the outstanding balance is lower while scheduled payments continue, later payments contain a larger principal component and the loan pays off sooner. This is a conceptual response rather than a detailed CPR calculation, and it does not cover variations in mortgage contracts or servicing practices. It also does not provide formulas for translating borrower-level prepayments into pool-level prepayment measures.
Key ideas
- CPR measures prepayment in excess of scheduled principal payments.
- A partial prepayment on a standard fixed-rate mortgage does not reset the original monthly payment.
- With a reduced balance and unchanged payment, subsequent installments include more principal.
- Partial prepayment can cause the mortgage to be paid off sooner.
- The answer does not detail contract-specific exceptions or pool-level CPR calculations.
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# Answer by dm63 (score 1, accepted) # How is CPR (re-)calculated for fixed fully amortizing agency mortgage pass-throughs given prior partial prepayments by mortgagors in the pool? Background: in the US, mortgagors are allowed to prepay any amount and in any arbitrary time during the lifetime of the mortgage, which leads to prepayment risk if this deviation differs from the previously assumed one. What I do not understand: is the CPR (a.k.a constant/conditional prepayment rate) being newly re-calculated once the mortgagor deviates from the original amortization schedule? Let's say the mortgagor obeys the amortization schedule until month t=99, but in month t=100 prepays 20% of his/her outstanding principal balance at the beginning of month t=100 (at the end of month t=99). If this being the case, then I assume that the remaining amortization schedule, the fixed monthly installments of subsequent months are also being recalculated based on the new beginning month outstanding principal balance, right? Or is CPR always calculated based on the original amortization schedule? I am working on a research paper, but still, after having searched on the internet, I could not find any clear answers to this potentially trivial question. I would be more than glad if you could help me pointing to an answer to this question. ## Answer by dm63 (score 1, accepted) https://quant.stackexchange.com/a/46761 The CPR is defined as the prepayment rate in excess of scheduled principal payments. I think the question you are asking is : what happens to scheduled principal payments when you partially prepay a fixed rate mortgage. I believe the answer is that for a standard mortgage, prepaying partially does not change the monthly mortgage payment which was calculated at inception. Going forward , this does mean that the mortgage will be paid off faster and there will be a larger component of principal in subsequent mortgage payments. Does that answer the question ?
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