Question

4 years ago you bought a home for $350,000, which at the time was 4.5% below the home’s fair market value. Since then, the market value of your home appreciated at a compounded rate of 2.3% annually, on average. What is your current equity in the home if you were to sell it at a fair market value today? Assume that when you purchased the home you took a $270,000, 4.5%, interest-only mortgage and always made the minimum required payments.

Subject is REE6045, i dont understand this problem.

Answer 1

Future Value:

Future Value is Value of current asset at future date grown at given int rate or growth rate.

FV = PV (1+r)^n
Where r is Int rate per period
n - No. of periods

Valueof House Today:

Particulars	Amount
Present Value	$       350,000.00
Int Rate	2.3000%
Periods	4

Future Value = Present Value * ( 1 + r )^n
= $ 350000 ( 1 + 0.023) ^ 4
= $ 350000 ( 1.023 ^ 4)
= $ 350000 * 1.0952
= $ 383328.03

Value of Equity = House Value - Loan Value

= $ 383328.03 - $ 270000

= $ 113328.03