Free Economics Essay Example

If the mortgage rate of a house rises from 5% to 10% yet the appreciation of the homes to be purchased increases from 2% to 9%, I will make the option of more likely buying the house.
In this scenario, the mortgage rate has risen by 5% this rate is achieved at by deducting the increase in mortgage from the previous mortgage rate in existence.
10% - 5% = 5%
The appreciation of the houses that consumers buy has risen from 2% to 9%. Thus, the appreciation rate is 7%.
9% - 2% = 7%
The appreciation rate is more than the increase in the mortgage rate. Thus purchasing the house would be a wise idea as it will be more valuable in the long run due to the greater increase in the appreciation rate (Homer, 2013, p. 41).
An example would be a house purchased at $ 100,000. In a period of 20 years, the yearly payment would be calculated using the formula below; fixed price divide by 1+interest rate. This calculation will be added to the number of years the loan is expected to be repaid thus calculating the expected cost of the house after a period. Therefore, since the appreciation rate of the house is increased more than the mortgage rate, as an investor, I would more likely purchase the home.

Scenario 2

If the interest rate is to be deducted from income, this will affect by purchasing decision of the house as an investor. In such an instance, I would be less likely to buy the home. This decision is attributed to the increase in mortgage rate that will not be covered from income. When the interest is deducted from income, it means that income will remain the same over the years. The mortgage deducted from the income would therefore not be enough to cover the mortgage expenses of the house purchase. Deduction of interest will reduce the amount of income received, and the principal interest deductions are home mortgage and home equity loan interest (Weberson & National Bureau of Economic Research, 2010, p. 26). Deducting the interest from income primarily home mortgage interest and home equity interest will mean that the value of the house will be less as the year’s progress and as an investor I would less likely purchase the house.

Scenario 3

If the taxes on the property were fully deductible from the income earned, this would affect my behavior to purchase as an investor, and I would more likely buy the house (Mishkin, 2009, pg. 69). The reason for buying in this scenario would be influenced by the fact that no taxes would be paid for the house that is purchased. Deducting the taxes from income further means that the long run value of the house purchased would be more. Moreover, no extra expenses will be incurred in paying taxes on the house purchased since the property tax has been deducted from the income earned. In this scenario, I would more likely buy the home.

Scenario 4

The depreciation costs on the house deducted from income influence the purchase decision in an inflationary economy by making the house less valuable in the long run. The purchase decision will thus be affected since, as an investor, one would be less likely to buy the home.
If the depreciation costs are deducted from the income in a deflationary economy, the house will be more valuable in the long run, and thus, the investor will be more likely to purchase it at present value (Mishkin, 2009, pg. 72).

References

Homer, S. (2013). A history of interest rates. New Brunswick, NJ: Rutgers University Press.
Mishkin, F. (2009). Understanding Interest Rates. In The economics of money, banking and financial markets (9th ed.). Boston: Addison-Wesley.
Weberson, J. & National Bureau of Economic Research. (2010). Understanding real interest rates. Cambridge, MA (1050 Massachusetts Avenue: National Bureau of Economic Research.