Assume you are a mortgage lender. You have offered a borrower a mortgage loan for $600,000 with a somewhat unusual structure.
The loan has a total maturity of 30 years, requires monthly interest-only payments for the first 7 years, and then requires monthly amortizing payments for the remaining 23 years. Also, the interest rate will "reset" at the end of 7 years from the initial rate to the "reset" rate shown below. The loan also requires the borrower to pay discount points at origination as shown below.
What is your expected annualized yield on this loan if you believe the borrower will prepay the loan at the end of the year indicated?
Do not round intermediate calculations. Provide your final answer to four decimal places with no punctuation other than a decimal point. For example, if you think the answer is 1.2345%, enter your answer as 0.0123.
Initial Rate: 4%
Reset Rate: 7.5%
Discount Points: 1.75%
Prepayment at end of year (out of 30): 9