• General
• Personal Finance
• Reviews & Ratings
• Wealth Management
• Popular Courses
• Courses by Topic

# Paydown Factor

## What Is a Paydown Factor?

A paydown factor is calculated as the principal portion of a monthly loan payment divided by the original principal of the loan. Paydown factors can be calculated monthly and may be included in monthly statements. A paydown factor is also an important metric that is commonly observed when analyzing structured products.

### Key Takeaways

• A paydown factor is the percent of principal received relative to the original principal amount.
• This factor enables borrowers to better understand paydown rates.
• A paydown factor is commonly reported when analyzing structured products and mortgage-backed securities.
• The paydown factor provides an indicator for the level of principal being paid down across a structured credit product's portfolio and thus serves as a good measure of the performance of these investments.

## Understanding Paydown Factor

A paydown factor helps a borrower or investor gain an understanding of the paydown rates involved with various credit products. Borrowers can calculate a monthly paydown factor to analyze the principal being paid each month. A paydown factor is also an attribute that is commonly reported when analyzing structured products and specifically mortgage-backed securities (MBS).

## Paydown Factor Examples

Loans provide a basic example of calculating a paydown factor. Some lenders may include a borrower’s paydown factor in their monthly statements. The paydown factor shows the amount of principal paid in the previous month divided by the original principal value.

For example, a borrower with a \$100,000 mortgage loan paying a 4% annual rate of interest over fifteen years will make monthly payments of \$592. The amortization schedule factors in the borrower's 20% down payment and amortizes \$80,000 over the life of the loan. In the first month, the borrower would pay approximately \$267 in interest with a principal payment of \$325. The paydown factor for the borrower’s first payment would then be \$325 / \$100,000, or 0.33%. As more of the principal is paid, the paydown factor increases.

### Structured Credit Products

Structured credit products typically include a portfolio of loans with varying credit qualities. Generally, these products will be comprehensively grouped by a target risk level based on the underlying credit qualities of the loans. The paydown factor can be a good metric for analyzing the performance of these investments since it provides an indicator for the level of principal being paid down across the portfolio.

Calculating the paydown factor for a portfolio of loans aggregates the calculation to include the total principal paid monthly, divided by the total comprehensive principal issued to borrowers.

Mortgage-backed securities commonly report paydown factors monthly. If the mortgage-backed security reports a steady paydown factor over time, then that is a good indication that the loans are not at high risk of delinquency or default. A significantly decreasing paydown factor can be a signal of increasing risk on the portfolio. If borrowers in the MBS are consistently reporting payment delinquencies, then a lower overall amount of the total portfolio principal will be paid down, and the paydown factor will show a significant decrease.

Ginnie Mae requires all mortgage-backed securities issuers to publish their paydown factors.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description