2011 GRAP practice exam part 2 question

[cotton]

Q: which of following factor generally affect prepayment risk for a mortgage.
1. change to interest rate
2. amount of principle outstanding.

A: both


I can understand interest rate change would affect prepayment. but how would principle amount outstanding affect prepayment? thanks

 

[delta123]

If principal oustanding is small , people tend not to refinance it as it doesn't seem to generate that much value and example would be auto loan , people don't refinance it often even though they could.

Any one pl correct if this is wrong