The question involves mathematics, specifically the calculation of interest payments on a home loan. It requires understanding the calculation of annual interest and the concept of equity, which is the home value minus the mortgage owed.
- The student's question pertains to the calculations related to the purchase and financing of a house.
- Specifically, it involves figuring out interest payments on a home loan.
- Arthur and Aretha Franklin purchased a home for $2.47 million with a down payment of $270,000, financing the remaining amount of $2.20 million at an interest rate of 7.6%.
- For the first three years, they paid interest only on the loan.
- To calculate the annual interest payment, we multiply the loan amount by the interest rate: $2,200,000 × 7.6% = $167,200 per year.
- This interest payment is made without reducing the principal loan amount, which remains at $2.20 million.
- Examples given such as the case of Frank and Ben help understand the concepts of home equity and property valuation.
- Equity is defined as the value of the property minus the amount still owed on the mortgage.
- Freda's equity is the full value of her home because she does not owe anything on a mortgage, while Frank owes $60,000 on an $80,000 loan (having paid off $20,000) and his home has a current value of $160,000, making his equity $100,000.