In what sense has the investor in a residential mortgage loan granted the borrower (homeowner) a loan similar to a callable bond?

What will be an ideal response?

Prepayment risk is the risk associated with a mortgage's cash flow due to prepayments.More specifically, investors are concerned that borrowers will pay off a mortgage when prevailingmortgage rates fall below the loan's note rate. For example, if the note rate on amortgage originated five years ago is 8% and the prevailing mortgage rate (i.e., rate atwhich a new loan can be obtained) is 5.5%, then there is an incentive for the borrower torefinance the loan.
The decision to refinance will depend on several factors, but the singlemost important one is the prevailing mortgage rate compared to the note rate. The disadvantageto the investor is that the proceeds received from the repayment of the loan mustbe reinvested at a lower interest rate than the note rate.This risk is the same as that faced by an investor in a callable corporate or municipalbond. However, unlike a callable bond, there is no premium that must be paid by the borrowerin the case of a residential mortgage loan. Any principal repaid in advance of thescheduled due date is paid at par.