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Ann would like to buy a house.

It costs $200,000.
She will make a $40,000 down payment.

She will take out a mortgage for $160,000.


It will be a 30 year, fully amortizing, FRM, with monthly payments and monthly compounding.
The annual interest rate is 4%.
She must pay 2% 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.

Anns net cash flow each month is total cash inflows minus total cash outflows that month.

She forecasts 3 possible scenarios for house price appreciation (HPA).


Optimistic Case: 9% annual HPA, hence 9/12% monthly HPA
Base Case: 4.5% annual HPA, hence 4.5/12% monthly HPA
Pessimistic Case: 0% annual HPA, hence 0/12% monthly HPA

1. Fill in the spreadsheet for Ann. (It is called an amortization schedule.)


2. Compute Anns annualized IRR from the mortgage in the spreadsheet. (Use the net cash flow.)
What is the IRR? Is it higher or lower than the mortgage contract rate? Why?

Anns annualized for the mortgage is 4.17%. It is higher than the mortgage interest rate (4%) because it
factors in the mortgage fees paid upfront.

3. Plot Anns mortgage balance in one graph. Place the figure here.

Mortgage Balance
$180,000.00
$160,000.00
$140,000.00
$120,000.00
$100,000.00
$80,000.00
$60,000.00
$40,000.00
$20,000.00
$0.00
0 50 100 150 200 250 300 350 400
4. Plot Anns mortgage payment, interest payment and principal payment in one graph. Place the figure
here.

PMT, Principal, Interest


$900.00
$800.00
$700.00
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
$0.00
1 16 31 46 61 76 91 06 21 36 51 66 81 96 11 26 41 56 71 86 01 16 31 46
1 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3

PMT Interest Pri nci pal

PMT, Principal, Interest


$900.00
$800.00
$700.00
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
$0.00
1 16 31 46 61 76 91 06 21 36 51 66 81 96 11 26 41 56 71 86 01 16 31 46
1 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3

Interest Pri nci pal


PMT, Principal, Interest
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 16 31 46 61 76 91 06 21 36 51 66 81 96 11 26 41 56 71 86 01 16 31 46
1 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3

Interest Pri nci pal

5. Plot Anns home equity every month under each of the three HPA scenarios in one graph. Place the
figure here.

Home Equity
$3,500,000.00

$3,000,000.00

$2,500,000.00

$2,000,000.00

$1,500,000.00

$1,000,000.00

$500,000.00

$0.00
1 13 25 37 49 61 73 85 97 09 21 33 45 57 69 81 93 05 17 29 41 53 65 77 89 01 13 25 37 49 61
1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 3 3 3 3 3 3

HPA 9% HPA 4.5% HPA 0%


6. Assume Ann will make the required monthly payment every month for 30 years. How much home
equity will Ann have after 15 years (180 months) of payments under each of the three scenarios?
In the optimistic scenario (9% hpa), Ann will have $664,340.17.
In the base scenario (4.5% hpa), Ann will have $289,042.52.
In the pessimistic scenario (0% hpa), Ann will have $96,731.52.