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Internal rate of return

Tim wants to buy an apartment that costs $750,000
with an 85% LTV mortgage. Tim got a 30-year, 3/1 ARM
with an initial teaser rate of 3.75% and monthly
payments. The reset margin on the loan is 300 basis
points above 1-year CMT. The index was 1% at the time
of origination. Tim also had to pay 3 points for this loan.
Suppose the index rate will remain 1% for the life of the
loan. Compute the true APR for this loan.

Compute the IRR for this loan assuming Tim will prepay
in 5 years.

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