6) Suppose you purchase a new home for 150,000 USD making a down payment of 30%

Question

6) Suppose you purchase a new home for 150,000 USD making a down payment of 30% and taking out a mortgage on the balance.

a) What is the return on your investment in the new home if one year later, the price of the home increases by 20%?

b) What is the return on your investment in the new home if one year later, the price of the home decreases by 20%?

c) How would you answers to a) and b) above change if your down payment was only 15%? Show your results.

d) Explain why the return on investment changes as the size of the down payment changes.

Explanation / Answer

a)

A 30% down payment on a $150,000 house = $45,000 so you invest $45,000 and borrow the other $105,000. After a year, you sell for $180,000 and pay off the $105,000 loan leaving you with $75000. So you invested $45,000 and got $75000 back after a year -

return on your investment in the new home = (75000-45000)/45000=66.67%

b)

A 30% down payment on a $150,000 house = $45,000 so you invest $45,000 and borrow the other $105,000. After a year, you sell for $120,000 and pay off the $105,000 loan leaving you with $15000. So you invested $45,000 and got $15000 back after a year -

return on your investment in the new home = (15000-45000)/45000=-66.67%

c) if the price of the home increases by 20%

A 15% down payment on a $150,000 house = $22500 so you invest $22500 and borrow the other $127500. After a year, you sell for $180,000 and pay off the $127500 loan leaving you with $52500. So you invested $22500 and got $52500 back after a year -

return on your investment in the new home = (52500-22500)/22500=133.33%

if  the price of the home decreases by 20%

A 15% down payment on a $150,000 house = $22500 so you invest $22500 and borrow the other $127500. After a year, you sell for $120,000. There is not enough money to pay off the $127500 loan leaving you with loss of 7500 gain. So you invested $22500 and then invested $7500 -

ROI = (-7500-22500)/22500=-133.33%

d)ROI increases as Down payment decreases if the conditions are favorable because you incur lesser liabilities. In case of adverse conditions, ROI decrease and downpayment decrease

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.