This question demonstrates how a balloon lowers home equity over the life of the mortgage...
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Accounting
This question demonstrates how a balloon lowers home equity over the life of the mortgage (higher risk of negative equity!).
Ann would like to buy a house.
It costs $2,500,000.
Her down payment will be $50,000.
She will take out a mortgage for the remainder.
It will be a 30 year, fully amortizing, FRM, with constant monthly payments and monthly compounding.
The annual interest rate is 4.50%.
She will pay $5,000 in closing costs at origination.
She will also pay 1.75% of the balance in buy-down points at origination.
Ann is pessimistic and forecasts house prices to fall by 0.5% every month.
12.How much home equity will she have after 10 years (120 months)?
(the answer is negative few hundred thousand dollars)
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