Ann would like to buy a house. It costs $800,000. Her down payment will be $40,000. She will take out a mortgage for $760,000. It will be a 30 year, fully amortizing, FRM, with constant monthly payments and monthly compounding. The annual interest rate is 4.00%. She must pay 2.5% in fees at the time of the loan. 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.
1. Fill in the spreadsheet for Ann. (It is called an amortization schedule.)
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?