Reference no: EM132927960
Housing Markets
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%.
Question 1: What selling price should you place on your home? Explain using capital budgeting calculations.
A third home, again comparable to the one that sold for $75,000, is being offered for sale. The only difference between this third home and the $75,000 home is the property taxes. The $75,000 home's property taxes are $1,500 per year, while the third home's property taxes are $1,000 per year. The differences are due to vagaries in how 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.
Question 2: Assuming the market rate of interest is still 7.5%, what should be the price of this third home? Why?
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