You are researching the housing market in Bloomington, Indiana, and you come upon an advertisement offering to
Question:
You are researching the housing market in Bloomington, Indiana, and you come upon an advertisement offering to sell a house for $240,000 with a zero interest rate mortgage. All you have to do is agree to make $4,000 payments ($240,000 ÷ 60 months) at the end of each month for five years. If you do so, the advertisement says you will not be charged any interest. When you see the offer, mortgages are typically being granted at a 6 percent annual interest rate.
Required:
1. If the builder demands a 6 percent return on investment, what is the actual value of the house? How much “implied” interest will you pay over the five years as you are paying off the house? The present value factor for an annuity with 60 periods and an interest rate of 0.5 percent (6 percent/12 months) is 51.72556.
2. If the builder is actually demanding a 6 percent return on investment, why would she advertise the mortgage as a “zero interest rate mortgage”?
Step by Step Answer:
Financial Accounting
ISBN: 9781264229734
11th Edition
Authors: Robert Libby, Patricia Libby, Frank Hodge