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.
1. What is the annualized and monthly IRR for the mortgage?
(b) Is it higher or lower than the mortgage contract rate? Why?