BREAKING: Target Test Prep releases Brand New 2026 On Demand GMAT prep course

Redeem

Mortage

This topic has expert replies
Post new topic Post Reply
Previous Topic Next Topic
Junior | Next Rank: 30 Posts
Posts: 14
Joined: Wed Sep 01, 2010 8:33 am

Mortage

by mbanit » Sat Oct 16, 2010 12:29 am
Please let me know the best answer for this and also why it so?

The newest trend in home buying is interest-only mortgages. These mortgages require a borrower to pay only the interest on the loan. This means that the principle (which is the amount borrowed) never gets any smaller. Buyers never accumulate any equity in their homes and often have to default. Therefore, these loans are bad for Americans and should be made illegal. The argument in the above passage depends on which of the following assumptions?

(A) Homeowners can't afford to pay more than the interest on the loan.

(B) Some things that are bad for Americans should be made illegal.

(C) Interest-only mortgages don't require the buyer to pay more than the interest.

(D) Buyers with no equity in their homes often have to default on their loans.

(E) Owners won't accumulate equity based on the increasing value of their house.
Last edited by mbanit on Sun Oct 17, 2010 6:08 am, edited 1 time in total.
Top
Source: — Critical Reasoning |
Master | Next Rank: 500 Posts
Posts: 201
Joined: Sat Jul 10, 2010 2:23 pm
Thanked: 7 times
Followed by:1 members

by ov25 » Sat Oct 16, 2010 2:34 am
imo A
if borrower pays more than int, it would build equity for him/her
Top
Junior | Next Rank: 30 Posts
Posts: 14
Joined: Wed Sep 01, 2010 8:33 am

by mbanit » Sat Oct 16, 2010 10:44 am
I thought answer should be either A or E. If you are saying A is answer, could you explain little more on why A is correct and E is wrong.
Last edited by mbanit on Thu Oct 21, 2010 12:38 am, edited 1 time in total.
Top
Master | Next Rank: 500 Posts
Posts: 201
Joined: Sat Jul 10, 2010 2:23 pm
Thanked: 7 times
Followed by:1 members

by ov25 » Sat Oct 16, 2010 11:07 am
mbanit wrote:I thought answer should be either A or E. If you are saying A is answer, could you explain little more on why A is correct and B is wrong.
Arg: i/o loans bad 4 americans, shld be illegal <- h/o that dont pay principal never accumulate equity
Some things that are bad for Americans
should be made illegal.
well is mortgage one among the 'some things'...so when mortgage is not one among these, this when negated should not effect conclusion
Owners won’t accumulate equity based
on the increasing value of their house.
in this case, say owners accumulate equity thru other means -- incr value etc, we prolly can't say that i/o loans are necessarily bad -- they allow incr value thru some other means right? i mean the point again is...it does not touch the arg

Only A, where if owners are not allowed to pay beyond interest -- to decrease principal, then these loans are bad, should be made illegal for americans

hth
Top
User avatar
Legendary Member
Posts: 1172
Joined: Wed Apr 28, 2010 6:20 pm
Thanked: 74 times
Followed by:4 members

by uwhusky » Sat Oct 16, 2010 11:55 am
Hey mbanit,

Could you please format your questions properly by removing unnecessary margins and spaces?
Yep.
Top
Senior | Next Rank: 100 Posts
Posts: 38
Joined: Sat Oct 16, 2010 10:27 pm

by Dangerous Dude » Sun Oct 17, 2010 3:33 am
I go with E...

Negation of E says....owners accumulate equity on the ccumulate equity based on the increasing value of their house.... therefor it weekens the argument... So E is assumption
Top
Junior | Next Rank: 30 Posts
Posts: 14
Joined: Wed Sep 01, 2010 8:33 am

by mbanit » Sun Oct 17, 2010 6:15 am
Answer given in the source book is E with below explanation. After seeing this explanation, does anyone think that A could be the answer. Because, my doubt is why A is wrong.

E. This critical-reasoning question requires you to identify the assumption. You're looking for a statement that connects the premises to the conclusion. An assumption isn't directly stated in the premises. (You have to accept that the stated premises are true, even if the text doesn't provide evidence for them.) Eliminate B because it just restates part of the conclusion. Choice C can't be an assumption because it restates information from one of the premises. Choice D also essentially restates
one of the premises. Choice A is a pretty solid choice; it seems reasonable that most people who take out interest-only mortgages do so because they can't afford to pay more than the interest. But the conclusion doesn't depend on this assumption. It does depend on the assumption in E that buyers who aren't paying down the principle on their loan won't accumulate value as their home value increases.
Top
Master | Next Rank: 500 Posts
Posts: 201
Joined: Sat Jul 10, 2010 2:23 pm
Thanked: 7 times
Followed by:1 members

by ov25 » Sun Oct 17, 2010 7:40 am
interesting mbanit!

Here is my comment. I agree to this to some extent.

Had A been "Homeowners are not allowed to pay more than the interest on the loan", then it would have been the only of all. The way it is, it requires an assumption that h/o are allowed to pay more than just interest.

However, E has its shortfalls. It's a good weakener none the less is not an assumption.
Conc: i/o loans are bad: they never build equity. E says i/o loans impact least in building equity. If so, how can we argue that i/o loans are bad? We just have to say 'it does not matter - equity builds by itself' which means arg does not tilt a bit.

Now lets say the arg is 'i/o loans never build equity' because i/o loans are bad and illegal' contrary to the passage. Even then, E - 'equity builds itself by incr value' does not impact the concl.

So my point question is BAD! What's the source anyway.

hth
Top
User avatar
Legendary Member
Posts: 1172
Joined: Wed Apr 28, 2010 6:20 pm
Thanked: 74 times
Followed by:4 members

by uwhusky » Sun Oct 17, 2010 10:08 am
I would question the source of this question as well.
Yep.
Top
Junior | Next Rank: 30 Posts
Posts: 14
Joined: Wed Sep 01, 2010 8:33 am

by mbanit » Sun Oct 17, 2010 10:43 am
Source is GMAT for Dummies 5th Edition
Top
Newbie | Next Rank: 10 Posts
Posts: 2
Joined: Sat Mar 27, 2010 10:28 am

by MarsMarsMars » Tue Oct 19, 2010 10:32 am
this type of wuestion would never be on the actual gmat of gmatprep
Top

GMAT/MBA Expert

User avatar
GMAT Instructor
Posts: 645
Joined: Mon Jul 26, 2010 12:42 pm
Location: US
Thanked: 527 times
Followed by:227 members

by e-GMAT » Tue Oct 19, 2010 11:33 am
Here is my analysis, which would probably help you see why choice E is the credible response!!

Disclaimer:This question assumes that you know the definition of equity. I have not seen an official question along these lines!!

Equity = Market Value of the house - loan on the house.

Lets assume that the homeowner purchased a house 3 years back for $150K. Further assume that the value of the house today is $200K. Since the homeowner did not pay any principle while purchasing the house, and has made all interest payments till today, the outstanding loan on the house today is $150K.

Hence, provided the value of the house appreciates, homeowner's equity in the house = $200K - $150K = $50K

Now, assume that the homeowner is unable to pay the interest on the loan. Since the value of the house is greater than the loan owed on the house, the homeowner can sell the house in the open market for $200K, pay the $150K loan and pocket the $50K. Hence, its better for him to sell the house and make some money.

Now, in the same situation if the market value of the house went down to $100K (instead of $200K). In this case, it is much better for the homeowner to foreclose the house.

Therefore, in a market where the market value of homes increases, interest only loans build equity and do not lead to foreclosures. Hence, the conclusion is only valid if the market value of houses stays the same or decreases with time.

-Rajat
Top
Post new topic Post Reply
• Page 1 of 1