Question: Suppose, as in the previous problem, you buy a home for $400,000 with a down payment of $100,000 and take out a mortgage for the

Suppose, as in the previous problem, you buy a home for $400,000 with a down payment of $100,000 and take out a mortgage for the remainder. Over the next three years, the price of the home rises to $500,000. However, during those three years, you also borrow $50,000 in additional funds using the home as collateral (called a “home equity loan”). Assume that, at the end of the three years, you still owe the $50,000 as well as your original mortgage.

a. What is your equity in the home at the end of the three years?

b. How many times are you leveraged on your investment in the home at the end of the three years?

c. By what percentage could your home’s price fall (after it reaches $500,000) before your equity in the home is wiped out?

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a Your equity in the home is now 150000 since 500000 350000 150000 b At the end of t... View full answer

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