Question
PLEASE ANSWER AS SOON AS POSSIBLE. URGENT. Ann would like to buy a house. It costs $2,500,000. Her down payment will be $50,000. She will
PLEASE ANSWER AS SOON AS POSSIBLE. URGENT.
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. In the spreadsheet where it says cash inflow, outflow and net cash flow you should only take into account cash flow related to the mortgage.
The Annualized IRR for the mortgage is 4.67%. It is higher than the mortgage contract rate.
QUESTION: WHY is the annualized IRR for the mortgage higher than the mortgage contract rate?
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Financial Institutions Management A Risk Management Approach
Authors: Anthony Saunders, Marcia Cornett, Otgo Erhemjamts
10th Edition
1260013820, 978-1260013825
