Please explain how the Effective Yield on a mortgage is affe

Please explain how the Effective Yield on a mortgage is affected by a prepayment penalty. Also, what is the impact of \"recoruse\" on the interet rate of a mortgage?

Solution

The prepaid penalty might be a percentage of the principal or interest payment. Effective Yield on a mortgage increases if a prepaid penalty is charged by banks as it the recovery will be more. Though the duration of loan will decrease but extra recovery will increase yield. This extra yield is to compensate in case the prevailing loan rates are lower than earlier rates. The banks would like to compensate that risk with higher yields.

Recourse loans have lower interest rates than non-recourse loans because in recourse loans the the banks can have access to the assets of the company in case it defaults it principal or interest payment. The risk of non-recovery is less in recourse loan hence the interests rate are less.
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