Question

12. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $135,000.

Mortgage A has a 5.25% 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 30 years, which mortgage has the lowest cost of borrowing (ie lowest annualized IRR)? Type 1 for A, type 2 for B.

13. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $135,000.

Mortgage A has a 5.25% 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?

Answer 1

12. FIRST COMPUTE THE PMT FOR B
N=360, I/Y=6/12, PV=-135000, CPT PMT=809.39

NEXT COMPUTE THE IRR,
N=360, PV=135000, PMT=-809.39, I/Y*12=6%

Now, COMPUTE THE PMT FOR A
N=360, I/Y=6/12, PV=-132975, CPT PMT=747.99

NEXT COMPUTE THE IRR,
N=360, PV=132975, PMT=-747.99, I/Y*12=5.42%

1. A, because 5.42% < 6%

13.

FIRST COMPUTE THE PMT FOR A
N=360, I/Y=6/12, PV=-132975, CPT PMT=747.99

Then compute the balance after 2 years, 24 months.
There are 360-24=336 months left.
N=336, I/Y= 6/12, PMT = 747.99; CPT PV = 131111.97

This balance will be Ann’s FV. Now compute Ann’s IRR.
N=24, PV = 132975, PMT=-747.99, FV=-131111.97, I/Y*12=> IRR_A =6.09%