Ann would like to buy a house. It costs $2,500,000. Her down payment will be $50,000. She will take out a mortgage for the remainder. It will be a 30 year, fully amortizing, FRM, with constant monthly payments and monthly compounding. The annual interest rate is 4.50%. She will pay $5,000 in closing costs at origination. She will also pay 1.75% of the balance in buy-down points at origination. Note: the home is bought and the loan is taken in month 0, the first payment is due in month 1.

Fill in the spreadsheet 2. Compute Anns annualized IRR for the mortgage in the spreadsheet. (Use the net cash flow.)

(2.a) What is the annualized IRR for the mortgage?

(2.b) Is it higher or lower than the mortgage contract rate?

(2.c) Why?

$2,500,000.00 House Price Down Payment Mortgage Mortgage Closing Costs Mortgage Buydown Points Total Mortgage Costs Annual Contract Rate Term (years) Payments per year Total Number of Payments Balloon $50,000.00 Green text represent inputs 50000.00 Purple text represent outputs $5,000.00 1.75% 47,875.00 4.50% 30 12 $0.00 Mortgage cashflow IRR Monthly IRR Annualized IRR Month Loan Balance (after pmt) Mortgage Payment Interest Principal Payment Cash inflow to borrower Cash outflow from borrower Net Cash Flow to Borrower $2,450,000.00 $2,446,773.71 $2,450,000.0 $47,87 $2,402,125.00 $12,413.79 12,413.799,187.50 3,226.29 12,413.79 10 12