Principal-weighted estimate of how long an MBS or mortgage investment remains outstanding under stated payment assumptions.
Average life is the principal-weighted average time until an MBS or mortgage investment’s principal is expected to be returned under stated payment and prepayment assumptions.
Average life matters because mortgage investors care not only about how much principal returns, but when each dollar returns. Mortgage principal arrives through scheduled amortization, curtailments, refinances, home sales, and other payoffs rather than in one payment at final maturity.
For borrowers, the term explains why MBS pricing is sensitive to refinance and payoff behavior. Faster prepayments usually shorten average life; slower prepayments usually extend it. The measure does not predict when one named borrower will repay.
Borrowers do not usually see average life in their own loan documents. It appears in MBS analytics, investor reports, and discussions of prepayment assumptions.
The term becomes practical when connecting borrower actions such as refinancing or selling a home to the market’s expectation about how long pooled cash flows will last. Any quoted average life is scenario-dependent because actual prepayments can differ from the model.
A simplified calculation is:
Here, P_t is principal expected to be returned at time t. The time unit may be months or years, but it must be used consistently.
| Term | What it focuses on |
|---|---|
| Weighted Average Maturity | Scheduled remaining maturity |
| Average life | Expected timing of principal return |
| Prepayment Risk | Principal returning sooner than expected |
| Extension Risk | Principal staying outstanding longer than expected |
Assume a simplified security is expected to return $25,000 of principal at the end of each of years 1, 2, 3, and 4:
The final principal arrives in year 4, but the average life is only 2.5 years because half the principal returned during years 1 and 2. A faster prepayment scenario would shift more principal earlier and shorten the result.
Average life differs from Weighted Average Maturity because maturity is tied to scheduled final repayment, while average life estimates when principal is expected to come back.
It also differs from Pool Factor. Pool factor measures remaining principal at a point in time. Average life estimates timing across future principal payments.
It also differs from Conditional Prepayment Rate. CPR is a prepayment-speed assumption or measure, while average life is a timing result influenced by prepayment behavior.