This question demonstrates how a balloon lowers home equity over the life of the mortgage (higher risk of negative equity!). Ann would like to buy a house. It costs $2,500,000. Her down payment will be $50,000. She will take out a mortgage for the remainder. It will be a 30 year, fully amortizing, FRM, with constant monthly payments and monthly compounding. The annual interest rate is 4.50%. She will pay $5,000 in closing costs at origination. She will also pay 1.75% of the balance in buy-down points at origination. Ann is pessimistic and forecasts house prices to fall by 0.5% every month.

12. How much home equity will she have after 10 years (120 months)? (the answer is negative few hundred thousand dollars)

13. How much home equity will she have after 29 years (348 months)?

Please answer question 13