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.
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.
2. Compute Ann’s annualized IRR for the mortgage in the spreadsheet. (Use the net cash flow.)
(a) What is the annualized IRR for the mortgage?
(b) Is it higher or lower than the mortgage contract rate?
(c) Why?