A home identical to yours in your neighborhood, sold last week for $150,000. You

Question

A home identical to yours in your neighborhood, sold last week for $150,000. Your home has a $120,000 assumable, 8% mortgage (compounded annually) with 30 years remaining. An assumable mortgage is one that the new buyer can assume at 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 15%. What price should you ask for your home?

A third home, again identical to the one that sold for $150,000, is also being offered for sale. The only difference between this third home and the $150,000 home is the property taxes. The $150,000 home's property taxes are $3,000 per year, while the third home's property taxes are $2,000 per year. The differences in the property taxes are due to vagaries in how the property tax assessors assessed the taxes when the homes were built. In this tax jurisdiction, once annual taxes are set, they are fixed for the life of the home. Assuming the market rate of interest is still 15%, what should be the price of this third home?

Explanation / Answer

Answer:

The value of the house shall be Difference of Market value ($150000) and present value of Mortgage payment :

Mortgage payment shall be = 120000 / PVAF (8%, 30 years )

= 120000 /      11.257783

= $    10,659.29

Now the present value of mortgage at current market rate (15%) = $    10,659.29 * PVAF (15%, 30 years)

= $    10,659.29 * 6.56597964

= $69,988.69

Hence the value of the house =150000 - $69,988.69 = $80,011.31

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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