In Year 1, Gabby Purchased a New Home for $500,000

question 11

Multiple Choice

In year 1, Gabby purchased a new home for $500,000 by making a down payment of$200,000 and financing the remaining $300,000 with a loan, secured by the residence, at6 percent. In year 3, Gabby made interest-only payments of $18,000 on the $300,000loan. On January 1, year 3, Gabby executed two home equity loans (both secured by the home) . The first was for $80,000 at an interest rate of 7 percent. The second home equity loan from a different bank (later in the day) was for $40,000 at an interest rate of 9 percent. In year 3, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home. What is the maximum amount of interest expense Gabby candeduct on these loans as home related interest expense?

• A) $25,905.
• B) $25,400.
• C) $18,000.
• D) $27,200.

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Definitions:

Consumer Price Inflation

The pace at which the average cost of goods and services elevates, resulting in diminished purchasing capacity.

CPI

The CPI, or Consumer Price Index, tracks the average variation in prices that urban customers pay for a selection of consumer goods and services over a period of time.

Consumer Price Index

A metric assessing the weighted mean of costs for a variety of consumer items and services, including food, transportation, and healthcare.

Inflation

The rate at which the general cost of goods and services rises, causing a decrease in the value of money.