Mortgages increase the risk faced by homeowners.

a. Explain how.

The mortgage is leverage for the homeowner, and leverage (Click to select) increases reduces risk.

b. What happens to the homeowners risk as the down payment on the house rises from 10 percent to 50 percent?

Instructions: Enter your responses rounded to one decimal place.

With a down payment of 10 percent, the leverage ratio is .

With a down payment of 50 percent, the leverage ratio is .

A down payment of 50 percent (Click to select) reduces increases the leverage ratio by a factor of relative to a down payment of 10 percent. (Hint: Refer to the Tools of the Trade: The Impact of Leverage on Risk; Leverage ratio = cost of the investment / owner's contribution to the purchase)