Half-Life

Anyone whose brain immediately went to thoughts of carbon dating and cool dinosaur fossils when they saw the term “half-life,” we want to go ahead and stop you right there. Not what we’re talking about today.

In the financial world, the term “half-life” is less The Land Before Time and more the land, uh...getting paid off. That’s because a half-life is the expected date on which half of the principal of a mortgage loan will be paid off, which, like carbon dating, ends up being more of a time estimate than an individual, specific date.

Why? Stuff happens. Maybe we make some late payments, or maybe the terms of our loan change. Maybe we find some old Spanish doubloons in our basement and use them to pay off a huge chunk of the mortgage all at once. Whatever we’ve got going on, when half the principal of our mortgage is paid off, that's its half-life.

Half-lives are also used in the world of MBSs, or mortgage-backed securities. The concept works the same way: when half of the principal attached to that security is paid off, that's the MBS’s half-life. We can make estimates about when that happy day will occur, but just as with individual mortgages, our best guess is still...a guess. And, just as with individual mortgages, lower interest rates typically means they’ll get paid off faster, while higher interest rates means they’ll get paid off more slowly.