Question

Mortgages increase the risk faced by homeowners. a. Explain how the mortgage is leverage for the homeowner, and leverage risk. b. What happens to the homeowner’s risk as the down payment on the house rises from 10 percent to 50 percent? With a down payment of 10 percent, the leverage factor is _________ With a down payment of 50 percent, the leverage factor is _________

Answer 1

Answer:

Mortgage is leverage for home owner because he owes an amount or is indebted to a lender, therefore mortgage is leverage for the homeowner.

As the down payment rises from 10 percent to 50 percent the risk of the home owner falls as he has less debt.

With a down payment of 10 percent the leverage factor is 9:1 ( Debt over equity, 90/10)

With a down payment of 50 percent the leverage factor is 1:1 (Debt over equity , 50/50)

Explanation: