You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked...

You have taken out a $350,000, 3/1 ARM. The initial rate of 6.0% (annual) is locked in for three years. Determine the owner's equity in the property after three years if the market value of the property at the end of year 3 is $400,000. The interest rate after the initial lock period is 6.5%. (Note: The term on this 3/1 ARM is 30 years.)

Expert Solution

An adjustable ratemortgage (ARM) has a rate that can change, causing your monthly payment to increase or decrease. Use this calculator to compare a fixed rate mortgage to a Fully Amortizing ARM.

Mathematically, the amount of owner's equity is the amount of assets minus the amount of liabilities. Since the amounts must follow the cost principle (and others) the amount of owner's equity does not represent the current fair market value of the business.

Owner's equity is viewed as a residual claim on the business assets because liabilities have a higher claim. Owner's equity can also be viewed (along with liabilities) as a source of the business assets.

Thus as per the question, the outstanding balance on the loan after 3 years would be $336,294.25.

The market value of the property at the end of year 3 is $400,000

The owner's equity in the property after three years = $400,000 - $336,294.25.= $63,705.75

jeff jeffy answered 2 years ago

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