Assume a residential mortgage lender has agreed to provide a…
Assume a residential mortgage lender has agreed to provide a $400,000 fixed rate, level payment, fully amortizing mortgage loan to a home buyer. The (annual) contract interest rate is 6.00%. The monthly payment loan will be amortized over 30 years. Thirty days have passed since the lender committed to finance the mortgage. On the day of closing, contact interest rates on this type of mortgage have increased from 6.00% to 6.50%. Assume secondary mortgage market investors assume this type of mortgage will remain outstanding for 6 years before being prepaid by the borrower. To sell the originated loan in the secondary mortgage market on the day of closing, the originating lender will have to discount the price by: