Question

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)

Answer 1