1. What is Lapse Rate in Mortgages?

The lapse rate measures the percentage of prepaid loans relative to outstanding loans in a mortgage portfolio. It helps lenders understand prepayment behaviors and assess portfolio risk.

2. How Does the Calculator Work?

The calculator uses the simple lapse rate formula:

Where:

• Prepaid Loans — Number of loans paid off early
• Outstanding Loans — Total number of active loans in portfolio

Explanation: The formula calculates what percentage of the mortgage portfolio is being prepaid, which affects profitability and risk management.

3. Importance of Lapse Rate Calculation

Details: Tracking lapse rates helps mortgage lenders forecast cash flows, manage reinvestment risk, and adjust pricing strategies based on prepayment trends.

4. Using the Calculator

Tips: Enter the number of prepaid loans and total outstanding loans. Both values must be positive numbers, with outstanding loans greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical mortgage lapse rate?
A: Rates vary by market conditions but typically range between 5-15% annually in stable markets.

Q2: How does lapse rate differ from default rate?
A: Lapse rate measures voluntary prepayments, while default rate measures involuntary failures to pay.

Q3: When is lapse rate highest?
A: During periods of falling interest rates when borrowers refinance, or when home sales increase.

Q4: How often should lapse rate be calculated?
A: Most lenders monitor monthly or quarterly to identify trends and adjust strategies.

Q5: Does this calculator work for other loan types?
A: While designed for mortgages, the same calculation applies to any loan portfolio.