Prepayment Inputs

%
Annual prepayment rate (0-100%)
months
1 = first payment month
$
For monthly prepayment estimate
Key Formulas
SMM = 1 - (1 - CPR)1/12
CPR = Annual Rate | SMM = Monthly Rate
PSA: CPR = min(0.2% × month, 6%)
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Prepayment Results

CPR (Annual) 6.00% 100% PSA
SMM (Monthly) 0.5143%
Standard CPR @ Month 6.00%
PSA Equivalent 100% PSA
Approximate Monthly Prepayment $5,143

PSA Prepayment Ramp

Calculation Steps

Model Assumptions

  • Uses the standard PSA benchmark designed for 30-year fixed-rate mortgages.
  • PSA ramp: CPR starts at 0.2% in month 1, increases 0.2% per month, reaches 6% plateau at month 30.
  • Monthly prepayment is approximate: Balance × SMM. Actual MBS cash flows also include scheduled principal.
  • PSA is a benchmark, not a forecast. Actual prepayment speeds vary with rates, housing turnover, and borrower behavior.
  • For educational purposes. Not financial advice. Consult MBS analytics for actual pool projections.

Understanding MBS Prepayment Speeds

What Are CPR, SMM, and PSA?

CPR (Conditional Prepayment Rate) is the annualized percentage of a mortgage pool's outstanding principal that prepays. A 6% CPR means that if prepayments continue at the current monthly rate for a full year, 6% of the pool would prepay.

SMM (Single Monthly Mortality) is the monthly equivalent of CPR. It represents the actual percentage of the beginning-of-month balance that prepays in that month. SMM and CPR are mathematically linked but not simply divided by 12.

PSA (Public Securities Association) is a standardized prepayment benchmark for 30-year mortgages. At 100% PSA, new mortgages prepay slowly and ramp up over 30 months to a 6% CPR plateau. Actual speeds are expressed as multiples of this benchmark (e.g., 150% PSA = 1.5x faster).

Conversion Formulas
CPR to SMM: SMM = 1 - (1 - CPR)1/12
SMM to CPR: CPR = 1 - (1 - SMM)12
PSA Model: CPR = min(0.2% × month, 6%) × PSA%

The PSA Prepayment Ramp

Seasoning Ramp (Months 1-30)

New mortgages prepay slowly. CPR starts at 0.2% and increases by 0.2% each month. This reflects borrower behavior: homeowners rarely refinance or move immediately after closing.

Plateau (Month 30+)

After 30 months, prepayments reach a steady state at 6% CPR. The pool is now "seasoned" and prepayment behavior stabilizes.

Why Prepayments Matter

Prepayment speeds directly impact MBS investors:

  • Faster prepayments return principal sooner, shortening duration and reducing total interest income. This is unfavorable when rates fall (reinvestment risk).
  • Slower prepayments extend duration, increasing interest rate sensitivity. This is unfavorable when rates rise (extension risk).
  • Prepayment uncertainty creates negative convexity in MBS, making them harder to hedge than standard bonds.

Frequently Asked Questions

CPR is an annualized rate while SMM is a monthly rate. They are not simply related by a factor of 12 because of compounding. The conversion formula accounts for the fact that prepayments each month reduce the balance for subsequent months. For example, a 6% CPR corresponds to approximately 0.514% SMM, not 0.5%.

The 30-month ramp reflects the "seasoning" pattern of mortgage pools. New borrowers rarely move or refinance immediately after closing due to transaction costs, lock-in effects, and inertia. Over time, life events (job changes, family growth, rate drops) cause prepayments to increase until reaching a steady state around 2.5 years after origination.

150% PSA means prepayments are 1.5 times the standard PSA benchmark. At month 30 and beyond, standard PSA assumes 6% CPR, so 150% PSA would be 9% CPR. At month 20 during the ramp, standard PSA is 4% CPR (0.2% × 20), so 150% PSA would be 6% CPR.

The monthly prepayment shown (Balance × SMM) is a simplification. In actual MBS cash flow calculations, unscheduled prepayments are applied to the balance after scheduled principal is deducted. The difference is small but matters for precise cash flow modeling. This calculator provides a quick estimate; professional MBS analytics tools use full cash flow models.

Standard PSA was designed for 30-year fixed-rate conventional mortgages. Other loan types (15-year, ARMs, jumbos, government loans) may have different prepayment characteristics. Analysts often use modified assumptions or entirely different models for these products. Always verify the appropriate benchmark for your specific MBS type.

Key drivers include: (1) Interest rates: Lower rates encourage refinancing, faster prepayments. (2) Housing turnover: Home sales trigger prepayments regardless of rates. (3) Loan characteristics: Loan size, credit score, LTV, and loan purpose affect refinancing propensity. (4) Seasonality: Home sales peak in spring/summer. (5) Economic conditions: Recessions slow both refinancing and turnover.
Disclaimer: This calculator is for educational purposes only and does not constitute financial advice. Prepayment models are simplified approximations. Actual MBS prepayment behavior depends on many factors not captured here. Consult professional MBS analytics and your financial advisor for investment decisions.

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