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15. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments...

15. Ann is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $3,200,000.

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.

Solutions

Expert Solution

MORTGAGE A : ANNUALIZED IRR = 5.184%

MORTGAGE B : ANNUALIZED IRR = 6.000%

ANSWER : TYPE 1 [ MORTGAGE A HAS LOWEST COST OF BORROWING]

jeff jeffy answered 3 months ago
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