A home purchased 2 years ago for $300,000 was resold for $260,000. The new buyer finances the purchase with a loan. If the loan-to-value ratio is 70%, what is the amount of the new buyer's equity in the home

Rationale

The amount of the new buyer’s equity in the home is $78,000.

To determine the buyer's equity, we first calculate the loan amount based on the loan-to-value ratio of 70% applied to the purchase price of $260,000. The loan amount would be $182,000, and subtracting this from the purchase price gives the equity of $78,000.

A ($78,000) CORRECT

This is the correct calculation of the new buyer's equity. The equity is determined by subtracting the loan amount ($182,000) from the home’s value ($260,000), resulting in $78,000 in equity.

B ($90,000) YOUR ANSWER

This choice miscalculates the equity by incorrectly assessing either the loan amount or the home value. To arrive at $90,000, one would need to assume a loan amount of $170,000, which does not align with the 70% loan-to-value ratio calculation.

C ($182,000) YOUR ANSWER

This option represents the loan amount rather than the equity. The equity is the value of the home minus the loan. Therefore, stating that the equity is $182,000 overlooks the necessary subtraction of the loan from the home value.

D ($210,000) YOUR ANSWER

This amount exceeds the home’s purchase price and does not make sense in the context of equity. Equity cannot be greater than the home value itself, and this choice misunderstands the relationship between the home’s value and the loan taken out.

Conclusion

Equity represents the ownership interest in a home, calculated as the difference between its market value and any associated debt. In this case, the new buyer’s equity of $78,000 reflects a common financial calculation based on the loan-to-value ratio, confirming that understanding equity is crucial for both homebuyers and sellers.

A home purchased 2 years ago for $300,000 was resold for $260,000. The new buyer finances the purchase with a loan. If the loan-to-value ratio is 70%, what is the amount of the new buyer's equity in the home

The amount of the new buyer’s equity in the home is $78,000.

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