1. Tom got a 30 year fully amortizing FRM for $1,500,000 at 6%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27 year FRM at 5%, but he must pay 2 points and $1000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the annualized IRR of refinancing for Tom assuming he stays until maturity? 2. Tim wants to buy an apartment that costs $1,500,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 4.875%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. Tim anticipates the index to be 2.50% at the time of the 1st reset. a. What is Tim's monthly mortgage payment going to be during the 1st 3 years? b. If the index resets to 2.50% as Tim forecasts, what will his new mortgage payment be in year 4? 1. Tom got a 30 year fully amortizing FRM for $1,500,000 at 6%, with constant monthly payments. After 3 years of payments rates fall and he can get a 27 year FRM at 5%, but he must pay 2 points and $1000 in closing costs to get the new loan. Think of the refinancing decision as an investment for Tom, he pays a fee now but saves money in the future in the form of lower payments. What is the annualized IRR of refinancing for Tom assuming he stays until maturity? 2. Tim wants to buy an apartment that costs $1,500,000 with an 85% LTV mortgage. Tim got a 30 year, 3/1 ARM with an initial teaser rate of 4.875%. The reset margin on the loan is 300 basis points above 1 year CMT. There are no caps. Tim anticipates the index to be 2.50% at the time of the 1st reset. a. What is Tim's monthly mortgage payment going to be during the 1st 3 years? b. If the index resets to 2.50% as Tim forecasts, what will his new mortgage payment be in year 4