#5) Calculate EIR for each of the mortgages

• Mortgage 1

  • 6% Fixed Coupon Rate

  • No Points

  • No Fees

  • 30 year amortization Period

  • Expected Life 3 years

• Mortgage 2

  • 4.5% Coupon Rate

  • 2 Points

  • 2% Origination Fees

  • 2% Prepayment Penalty if prepaid within the first 5 years

  • 30 year amortization period

  • Expected life 3 years

• Mortgage 3

  • Same as Mortgage 2 EXCEPT

    • it is uncertain how long the household (the borrower) will stay in the house before moving and prepaying the loan. But you estimate that there is 90% probability that the borrower will sell the house and move at the end of 10th year and so there is a 10% chance that the borrower will hold the mortgage till the end of amortization period. Prepayment penalty is typically a percentage of the amount being prepared.