This is a question for someone who understands CMOs well, or probably anyone who has taken a mortage… Page 368, coloumn (5) The “scheduled” mortgage payment is going down with time. Now the only way that would make sense for me is that upon prepayment you become entitled to pay less in the comming months if you want to… So say you took out a loan for a 400, 000 $ house at 8.125 rate you are supposed to pay 2,975.86 each month for 357 months if you decided to prepay 443.38 in the first months… a new amortization payment is calculated, and you are allowed to pay 2,972.57 for the remaining 356 months is my logic correct? else how can the mortgage payments be going down?
Yes, when you prepay, it means you are covering the interest and principal payments due that period, PLUS extra which will bring down your remaining principal, which would lower your following interest payments changing your amortization schedule
“Yes, when you prepay, it means you are covering the interest and principal payments due that period, PLUS extra which will bring down your remaining principal, which would lower your following interest payments changing your amortization schedule” agree on that, but does it lower your next months TOTAL required payment so say you agreed with the bank to pay $700 a month for 30 years but then one months you made a huge payment of $10,000 are you now allowed to make a payment of less than $700 in the upcommings months, say $650 (hypothetical, forget the math) or do you still have to keep paying $700, you just will finish paying your loan sooner…
"agree on that, but does it lower your next months TOTAL required payment " No. All it does is reduce the NUMBER of payments, not the amount. So, to give you super-simple example: You owe 500 bucks to the bank and are supposed to pay this back in 5 yrs. So you’re supposed to pay back 100 bucks/yr In the first yr you pay back 200 bucks. It doesn’t make your second yr’s payment go away, instead it reduces your amortization period to 4 yrs. Makes sense? Remember, it’s a simple example.
Thank Iginla I guess then the only thing that explains the lower total monthly cash inflow into the pool so early on is that by prepayment they meen FULL prepayment and not currtailment, and thus some people have fully paid and dropped out of the pool completely so for example if we say SSM is 0.02 percent in order for the coloumn (5) in page 368 to be correct, those 0.02 are prepayments, nobody currtailed… agree ?
awesome thanks Iginla. And yes gulf you’re right w/ that last comment its more of a general statement about prepmts