Yes, you are correct the interest rate on outstanding principal stays the same and that is the key of why early payoff helps lender.

Let's take an example. $100 lent at 10% for three years. Borrowers repaid loan in 1 year.

Total Interest received if borrower followed the schedule = $16.16

Total Principal paid back = $100

Total Cash inflow = $100 + $16.16 = $116.16

Cash on Cash Return = $116.16 - $100 / $100 = 16.16% over three years

When borrower pays fully at the end of first year

Interest received in first year = $6.65

Principal received in first year = $30.07

Final payment for principal = $69.93

Total Cash inflow = $6.65 + $30.07 + $69.93 = $106.65

Cash on Cash Return = 6.65% over 1 year or 19.95% over 3 years if you keep lending $100 to borrower who pays back after a year.

Your interest realization rate = $6.65 * 3 /$16.16 = 123%

Maybe I'm missing something here, correct me if I am.

But the interest rate on the principal outstanding is still the same at month 0 as at month 35. The dollar amount paid in interest is more in month 0, but interest rate doesn't change. If you are earning 10% on the note at month 0, you are still earning 10% on the remaining principal at month 35.

Maybe you are referring to default risk is lower when they are fully paid, which is obviously true because default risk has gone to 0.