A home comparable to yours in your neighborhood sold last week for $75,000. Your
ID: 2497370 • Letter: A
Question
A home comparable to yours in your neighborhood sold last week for $75,000. Your home has a $60,000 assumable 8% mortgage (compounded annually) with 30 years remaining. An assumable mortgage is one that the new buyer can assume on the old terms, continuing to make payments at the original interest rate. The house that recently sold did not have an assumable mortgage; that is, the buyers had to finance the house at the current market rate of interest, which is 7.5%. What selling price should you place on your home? Explain using capital budgeting calculations.
Explanation / Answer
The value of the house is the difference between market value of $75,000 and preent value of mortgage payment.
The present value of mortgage payment is = $60,000/PV of 8% at 30 years
= $60,000/11.2579
= $5,329.59
Working:
Present value of mortgage at current market rate of 7.5% = $5,329.59*PV of 7.5% at 30 years
= $5,329.59*11.8707
= $63,265.96
Hence, the value of the house = $75,000 - $63,265.96
= $11.734.04
Working:
Year Presnet value factor at 8% (1/1.08=) 1 0.9259 2 0.8573 3 0.7938 4 0.735 5 0.6806 6 0.6302 7 0.5835 8 0.5403 9 0.5003 10 0.4632 11 0.4289 12 0.3971 13 0.3677 14 0.3405 15 0.3152 16 0.2919 17 0.2703 18 0.2503 19 0.2317 20 0.2146 21 0.1987 22 0.1839 23 0.1703 24 0.1577 25 0.146 26 0.1352 27 0.1252 28 0.1159 29 0.1073 30 0.0994 Total 11.2579Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.