Question

Suppose you buy a house for $320,000. One year later, the market price of the house has fallen to $285,000.

(1) (3pt) What is the return on your investment in the house if you made a down payment of 30 percent and took out a mortgage loan for the other 70 percent? Be sure to show your calculations in your answer.

(2) (3pt) What if you made a down payment of 5 percent and borrowed the other 95 percent? Be sure to show your calculations in your answer.

(3) (4pt) According to your answer in part (1) and (2), which borrowing strategy will give you the highest return or lowest loss on your investment in the house? Can you think of a reason why you would not use the strategy that gives you the highest return or lowest loss in this case?

Answer 1

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