Question

3. Your aunt bought a house for $300,000 and put 20% as down payment. Six years later, she sells the house for $400,000. In between, she paid off $20,000 of the bank loan. How much equity did your aunt have when she sold the house and what annual return on the house's Equity did she make?

Answer 1

Aunt's initial equity = 300,000 * 0.20 = $60,000

Loan amount = 300,000 - 60,000 = $240,000

Amount paid to the bank = $20,000

Proceeds from selling the house = $400,000

Amount owed to the bank = Loan amount - Amount paid to the bank

Amount owed to the bank = 240,000 - 20,000 = $220,000

Equity she has when the house is sold = Proceeds from selling the house - Amount owed to the bank

Equity she has when the house is sold = 400,000 - 220,000

Equity she has when the house is sold = $180,000

Annual return ont he house's equity = (Equity when sold/ Initital equity)^(1/6) - 1

Annual return ont he house's equity = (180,000/60,000)^(1/6) - 1

Annual return ont he house's equity = 0.2009369552

Annual return ont he house's equity = 20.09369552%