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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.

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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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  • $\begingroup$ Do you mean that the remaining life of the mortgage is going to be reduced? I am still a bit confused. For me this is rather a question of convention how it is done in the US mortgage industry: either, as you wrote it; the monthly payment remains the same, but the remaining life of the mortgage will be shortened, or vice versa, the remaining life of the mortgage stays the same, but the monthly payments will be smaller for subsequent months. Although in the latter one, the calculation becomes a bit involved, since everything has to be recursively calculated. Thank you for your answer. $\endgroup$ – lrdbs Jul 23 '19 at 12:46
  • $\begingroup$ yes, the first thing. the remaining life is reduced. $\endgroup$ – dm63 Jul 23 '19 at 13:02
  • $\begingroup$ Thank you once again, I accepted your answer. Because it is the most logical and beneficial to mortgagors, and the results of both types of calculations in Excel and also common sense support it. Reducing remaining mortgage life always leads to fewer interest payments in the future. Although I still could not find any information relevant to the US mortgage market. In the UK, mortgagors can choose between the two options, and they definitely go for the one which reduces the remaining mortgage term. For the sake of research, I am going to assume the same for the US, as well. $\endgroup$ – lrdbs Jul 23 '19 at 17:21
  • $\begingroup$ Nevertheless, I asked the same question at Fannie Mae in the meantime. No answer yet, but I am curious how they do it. I will paste the answer here once I get one from them. $\endgroup$ – lrdbs Jul 23 '19 at 17:26
  • $\begingroup$ Answer by Fannie Mae: Fannie Mae does not calculate CPR on its own, but it lets dealers calculate it. $\endgroup$ – lrdbs Jul 26 '19 at 7:30

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