DEFINITION of 'Constant Percent Prepayment'

Annualized estimate of mortgage loan prepayments, computed by multiplying the average monthly prepayment rate by 12. This is used to determine cash flow in structured finance transactions, often referred to as the secondary mortgage market. It models the risk of unscheduled return of principal, which affects fixed income returns.




BREAKING DOWN 'Constant Percent Prepayment'

Market data suggests that the average mortgage is paid off in its 12th year, which leads to assumption of "12-year-prepaid life." Yields are based on assumed prepayment rates. Among the most active participants in the secondary market are Fannie Mae and Freddie Mac, both of which are government-sponsored enterprises.




RELATED TERMS
  1. Prepayment Model

    A model used to estimate the level of prepayments on a loan portfolio ...
  2. Public Securities Association Standard ...

    An assumed monthly rate of prepayment that is annualized to the ...
  3. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  4. Prepayment Penalty

    A clause in a mortgage contract that says if the mortgage is ...
  5. Prepayment Risk

    Prepayment risk is the risk associated with the early unscheduled ...
  6. Burnout

    A period of slowing mortgage prepayment within a mortgage backed ...
Related Articles
  1. Personal Finance

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  2. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  3. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  4. Insights

    Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

    Is the U.S. Congress' failure to rein in these mortgage giants to blame for the financial fallout?
  5. Personal Finance

    Finding the Best Mortgage Rates in 2017

    As home-buying technology has progressed, the process of finding the best mortgages rates can all be done online. Here's how:
  6. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  7. Small Business

    Remodeling The Housing Finance Industry

    The meltdown in mortgage-backed securities is bringing about reform in home financing.
  8. Personal Finance

    What You Need to Know About Fannie Mae Loans

    Fannie Mae (officially the Federal National Mortgage Association, or FNMA) is a government-sponsored enterprise (GSE) – that is, a publicly traded company which operates under Congressional charter ...
  9. Personal Finance

    Conventional Mortgage

    A conventional mortgage is any type of homebuyer's load that is not offered or secured by a government entity but rather available through a private lender.
  10. Investing

    Defeasance Reduces Commercial Real Estate Fees

    Try this alternative to short-term variable-rate financing when using leverage to buy property.
RELATED FAQS
  1. Do FHA Loans Have Prepayment Penalties?

    Learn whether FHA loans have prepayment penalties, and find out the rules governing interest charges when prepaying your ... Read Answer >>
Trading Center