Tim wants to buy an apartment that costs $1,000,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 3.25%. The reset margin on the loan is 300 basis points above 1 year CMT. There areno caps. The index was 1% at the time of origination. Tim also had to pay 1 point for this loan.

Suppose the index rate will remain 1% for the life of the loan. Compute the annualized IRR for this loan assuming Tim will prepay in 5 year