Check my work 4 Mortgages increase the risk faced by homeowners. a. Explain how.
ID: 2616378 • Letter: C
Question
Check my work 4 Mortgages increase the risk faced by homeowners. a. Explain how. The mortgage is leverage for the homeowner, and leverage Cncreases Brisk nts b. What happens to With a down payment of 10 percent, the leverage factor is the homeowner's risk as the down payment on the house rises from 10 percent to 50 percent? eferences With a down payment of 50 percent, the leverage factor is A down payment of so percent me rage atio by arelatve t dow pamentof to 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)Explanation / Answer
a. The mortgage is leverage for the homeowner, and leverage increases risk.
b. From the formula in the Tools of the Trade we know that with 10 percent down, the leverage factor is 10, and with 50 percent down, it is 2. A down payment of 50 percent reduces risk by a factor of 5 relative to a down payment of 10 percent.