Paydown Factor

What Is a Paydown Factor?

A paydown factor is calculated as the principal portion of a month to month loan payment separated by the original principal of the loan. Paydown factors can be calculated month to month and might be remembered for month to month statements. A paydown factor is likewise an important metric that is normally seen while breaking down structured products.

Grasping Paydown Factor

A paydown factor assists a borrower or investor with gaining a comprehension of the paydown rates engaged with different credit products. Borrowers can compute a regularly scheduled paydown factor to examine the principal being paid every month. A paydown factor is likewise an attribute that is ordinarily reported while dissecting structured products and explicitly mortgage-backed securities (MBS).

Paydown Factor Examples

Loans give an essential instance of computing a paydown factor. A few lenders might incorporate a borrower's paydown factor in their month to month statements. The paydown factor shows the amount of principal paid in the previous month isolated by the original principal value.

For instance, a borrower with a $100,000 mortgage loan paying a 4% annual rate of interest north of fifteen years will make regularly scheduled payments of $592. The amortization schedule factors in the borrower's 20% down payment and amortizes $80,000 over the life of the loan. In the main month, the borrower would pay roughly $267 in interest with a principal payment of $325. The paydown factor for the borrower's most memorable payment would then be $325/$100,000, or 0.33%. As a greater amount of the principal is paid, the paydown factor increments.

Structured Credit Products

Structured credit products commonly incorporate a portfolio of loans with differing credit characteristics. Generally, these products will be thoroughly gathered by a target risk level in light of the underlying credit characteristics of the loans. The paydown factor can be a decent measurement for investigating the performance of these investments since it gives an indicator to the level of principal being paid down across the portfolio.

Computing the paydown factor for a portfolio of loans aggregates the calculation to incorporate the total principal paid month to month, separated by the total thorough principal issued to borrowers.

Mortgage-backed securities generally report paydown factors month to month. In the event that the mortgage-backed security reports a consistent paydown factor over the long run, then, at that point, that is a decent indication that the loans are not at high risk of delinquency or default. An essentially decreasing paydown factor can be a signal of expanding risk on the portfolio. On the off chance that borrowers in the MBS are reliably reporting payment delinquencies, a lower overall amount of the total portfolio principal will be paid down, and the paydown factor will show a huge lessening.

Ginnie Mae requires all mortgage-backed securities issuers to distribute their paydown factors.

Highlights

• A paydown factor is the percent of principal received relative to the original principal amount.
• The paydown factor gives an indicator to the level of principal being paid down across a structured credit item's portfolio and subsequently fills in as a decent measure of the performance of these investments.
• A paydown factor is normally reported while investigating structured products and mortgage-backed securities.
• This factor empowers borrowers to better comprehend paydown rates.