Question

1) Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $4,500,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage A?

2)Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $4,500,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, what is Ann’s annualized IRR from mortgage B?

-Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $4,500,000.

Mortgage A has a 4.38% interest rate and requires Ann to pay 1.5 points upfront.

Mortgage B has a 6% interest rate and requires Ann to pay zero fees upfront.

Assuming Ann makes payments for 2 years before she sells the house and pays the bank the balance, which mortgage has the lowest cost of borrowing (ie lowest annualized IRR)? Type 1 for A, type 2 for B.

Answer 1

Part (1):

Monthly payment of mortgage A is $2,248.11 and the loan balance after 2 years= $434,838.60

Annualized IRR of Mortgage A= 5.18371%

Part (2):

Monthly payment of mortgage B is $ 2,697.98 and the loan balance after 2 years= $438,607.06

Annualized IRR of Mortgage B= 6%

Part (c ): Mortgage A has the lowest IRR. Answer is 1

Details of calculations as below: