Question: 1) Smith is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $450,000. Mortgage A has a 4.25% interest rate

1) Smith is looking for a fully amortizing 30 year Fixed Rate Mortgage with monthly payments for $450,000.

Mortgage A has a 4.25% interest rate and requires Smith to pay 1.5 points upfront.

Mortgage B has a 5% interest rate and requires Smith to pay zero fees upfront.

a) Assuming Smith makes payments for 2 years before she sells the house and pays the bank the balance, what is Smiths Annualized IRR from mortgage A?

b) Assuming Smith makes payments for 2 years before she sells the house and pays the bank the balance, what is Smiths Annualized IRR from mortgage B?

c) Assuming Smith makes payments for 2 years before she sells the house and pays the bank the balance, which mortgage has the lowest cost of borrowing (i.e. lowest Annualized IRR)? Type 1 for A, type 2 for B.

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