Annualized mortgage-pool prepayment rate used to compare assumed or observed payoff speeds.
Conditional prepayment rate, usually shortened to CPR, is an annualized rate describing how quickly eligible mortgage principal is assumed or observed to prepay.
CPR matters because borrowers can repay mortgages before their scheduled maturity. A refinance, home sale, or other early payoff returns principal to a mortgage pool sooner than scheduled amortization alone would.
For investors, the pace affects how quickly principal comes back, how long a security is expected to remain outstanding, and whether returned cash must be reinvested when market yields are lower. For borrowers, CPR shows how thousands of ordinary payoff decisions become a market-wide cash-flow measure.
CPR is called conditional because each period’s prepayment is measured against the principal still eligible to prepay, not against the pool’s original balance forever. A 10% CPR therefore does not mean exactly 10% of the original pool will disappear every calendar year.
Borrowers rarely see CPR in consumer mortgage documents. It appears after origination in MBS analytics, pool reporting, valuation models, security disclosures, and discussions of Prepayment Risk.
The term becomes practical when comparing prepayment behavior across pools or scenarios. Analysts may use historical CPR, model a future CPR path, or compare actual results with an assumed path such as the PSA Prepayment Model.
Borrowers do not choose a CPR and are not charged a CPR. Their individual loan events contribute to aggregate results, while analysts calculate the rate at the pool or cohort level.
CPR is connected to Single Monthly Mortality, or SMM, which expresses the prepayment rate for one month.
Use decimal values in the formula. For example, 0.006 means 0.6% SMM.
The formula compounds the share that remains each month. Multiplying SMM by 12 is only an approximation and becomes less accurate as the monthly rate increases.
Assume a mortgage cohort records 0.60% SMM for a month. Annualizing that monthly pace gives:
The equivalent pace is about 6.97% CPR. This does not predict that exactly 6.97% of original principal will pay off during the next year. It states the annualized result of repeating the same conditional monthly rate.
Now suppose mortgage rates decline enough to make refinancing attractive for more borrowers. An analyst may increase expected CPR, which implies faster principal return and usually a shorter Average Life for the pool or security.
| CPR movement | Plain-language interpretation | Possible cash-flow effect |
|---|---|---|
| CPR rises | More principal prepays at the assumed pace | Principal returns sooner |
| CPR falls | Less principal prepays at the assumed pace | Principal remains longer |
| CPR changes by pool | Borrower and loan characteristics differ | Expected lives and values may diverge |
| CPR changes over time | Incentives, seasonality, and loan age change | One fixed speed may not fit every month |
CPR is not inherently good or bad. Its effect depends on the security, its price, its coupon, and what an investor expected when purchasing it.
CPR differs from Single Monthly Mortality because CPR is annualized while SMM covers one month. The formulas convert between them.
It also differs from Prepayment Risk. Prepayment risk is the uncertainty or exposure. CPR is one way to express assumed or observed prepayment speed.
It also differs from Average Life. CPR is a prepayment-speed input or observation; average life is a principal-timing result influenced by that speed.
CPR also differs from a mortgage’s interest rate. The note rate is a borrowing-cost term in the loan contract. CPR describes payoff behavior across mortgage collateral.