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Chapter 5, Solutions        Cornett, Adair, and Nofsinger

An appreciation of 4% per year will result in a forecast future value of the home using the original purchase price in equation 5-1:

The amount of equity is the difference between the home’s value and the outstanding balance on the mortgage:

Equity = $182,497.94-$104,507.44=$77,990.50

4&5-9 Construction Loan You have secured a loan from your bank for 2 years to build your home.  The terms of the loan are that you will borrow $100,000 now and an additional $100,000 in one year. Interest of 10 percent APR will be charged on the balance monthly.  Since no payments will be made during the two-year loan, the balance will grow at the 10% compounded rate.  At the end of the two years, the balance will be converted to a traditional 30-year mortgage at a 6 percent interest rate.  What will you paying monthly mortgage payments (Principal and Interest only)?

Use equation 5-1 to calculate the capitalized value of your mortgage at the end of year 2:

This is the amount that you will need to finance over 30 years at 6%.  Use equation 5-9 to compute the monthly payment:

4&5-10 Construction Loan You have secured a loan from your bank for 2 years to build your home.  The terms of the loan are that you will borrow $100,000 now and an additional $50,000 in one year. Interest of 9 percent APR will be charged on the balance monthly.  Since no payments will be made during the two-year loan, the balance will grow.  At the end of the two years, the balance will be converted to a traditional 30-year mortgage at a 7 percent interest rate.  What will you pay as monthly mortgage payments (Principal and Interest only)?

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