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Screen Shot 2019-03-24 at 3.20.01 PM.png - Prepayment Risk...

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Unformatted text preview: Prepayment Risk It is the risk concerned with the pre mature prepayments of the loan. The investors are concerned that the mortgage loan will be paid off by the borrowers when the prevailing interest rates in the market will dip below the rate of interest of the mortgage loan. This dip in the interest rates encourages the borrowers to refinance and prepay the existing mortgage loan. These prepayments will cause the cash flows related to the mortgage loan to fall causing a loss to the investors. Comment Step 20f 3 A a. In case where the payment by the borrowers is more than the interest rate but less than the amount required to completely pay ofl the loan then it is called curtailment of the loan. Recasting of the loan does not happen in curtailment instead the monthly mortgage payment remains the same but the excess payment is applied towards the payment of principal in the coming payment periods. The amount of principal that is considered prepaid is the excess amount that would have been paid had the excess payment would not have been made. This results in shortening of the period of the loan from what is predetermined. Some mortgage loans apply mortgage penalties in case ol any prepayment by the borrower. However, this is an option which is available to the borrower in cases ol mortgage loans which allows the borrower to refinance the loan. In case oi lixed interest securities the rules related to the prepayment penalty are made at the state level. Some states allows the [prepayment penalties and some states disallows them. ...
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  • Fall '17
  • musab kurnaz
  • Interest, Mortgage loan, rate of interest of the mortgage loan

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