Question

A property is purchased for $200,000 with an 80 percent LTV. After five years, the owner's equity is $80,000. What would be the approximate annual expected appreciation rate on home equity (annual EAHE)?

Answer 1

Answer:

14.57%

Explanation:

Data provided in the question:

Purchasing cost of the property = $200,000

LTV = 80%

Time, n = 5 years

owner's equity = $80,000

Now,

Loan amount = Purchasing cost × LTV

or

Loan amount = $200,000 × 80%

or

Loan amount = $160,000

Thus,

Annual EAHE = $(\frac{\textup{Loan}}{\textup{Equity}})^{\frac{1}{n}}-1$

or

Annual EAHE = $(\frac{\textup{160,000}}{\textup{80,000}})^{\frac{1}{5}}-1$

or

Annual EAHE = 0.1487

or

Annual EAHE = 0.1457 × 100% = 14.57%