the fixed-rate, level payment, fully amortized mortgage is that the borrower pays interest and repays prin- cipal in equal installments over an agreed-upon period of time, called the maturity or term of the mortgage. The frequency of payment is typi- cally monthly. Each monthly mortgage payment for this mortgage design is due on the first of each month and consists of:   1. interest of ¹ ₁₂th of the annual interest rate times the amount of the out- standing mortgage balance at the beginning of the previous month, and 2. a repayment of a portion of the outstanding mortgage balance (princi- pal).   The difference between the monthly mortgage payment and the por- tion of the payment that represents interest equals the amount that is applied to reduce the outstanding mortgage balance. The portion of the monthly mortgage payment applied to interest declines each month and the portion applied to reducing the mortgage balance increases each month. The reason for this is that as the mortgage balance is reduced with each monthly mortgage payment, the interest on the mortgage bal- ance declines. Since the monthly mortgage payment is fixed, an increas- ingly larger portion of the monthly payment is applied to reduce the outstanding principal in each subsequent month. The monthly mortgage payment is designed so that after the last scheduled monthly payment of the loan is made, the amount of the outstanding mortgage balance is zero (i.e., the mortgage is fully repaid or amortized). The cash flow from this mortgage loan, as well as all mortgage designs, is not simply the interest payment and the scheduled principal repayments. There are two additional factors-servicing fees and prepayments. Every mortgage loan must be serviced. The servicing fee is a portion of the mortgage rate. If the mortgage rate is 8.125% and the servicing fee is 50 basis points, then the investor receives interest of 7.625%. The interest rate that the investor receives is said to be the net interest or net coupon. The servicing fee is commonly called the servicing spread. The dollar amount of the servicing fee declines over time as the mortgage amortizes. This is true for not only the mortgage design that we have just described, but for all mortgage designs. The second modification to the cash flow is that the borrower typi- cally has the right to pay off any portion of the mortgage balance prior to the scheduled due date typically without a penalty. Payments made in excess of the scheduled principal repayments are called prepayments. When less than the entire amount of the outstanding mortgage balance