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$ RENT-OR-BUY ANALYSIS A. COST OF RENTING 1. Annual rental costs ( 12 × monthly

ID: 2798833 • Letter: #

Question

$ RENT-OR-BUY ANALYSIS A. COST OF RENTING 1. Annual rental costs ( 12 × monthly rental rate of $ ) $- 2. Renter’s insurance 3. Opportunity cost of security deposit: $ × after-tax savings rate - Total cost of renting (line A.1 + line A.2 + line A.3) $- B. COST OF BUYING 1. Annual mortgage payments (Terms: $ , months, %) $- ( 12 × monthly mortgage payment of $- ) 2. Property taxes ( % of price of home) 3. Homeowner’s insurance ( % of price of home) 4. Maintenance ( % of price of home) 5. After-tax cost of interest on down payment and closing costs - ( $ × % after-tax rate of return) 6. Total costs (sum of lines B.1 through B.5) $- Less: 7. Principal reduction in loan balance (see note below) $- 8. Tax savings due to interest deductions* - (Interest portion of mortgage payments $- × tax rate of %) 9. Tax savings due to property tax deductions* - (line B.2 × tax rate of %) 10. Total deductions (sum of lines B.7 through B.9) - 11. Annual after-tax cost of home ownership $- (line B.6 - line B.10) 12. Estimated annual appreciation in value of home ( % of price of home) Total cost of buying (line B.11 - line B.12) $- "Note: Find monthly mortgage payments from Exhibit 5.11. An easy way to approximate the portion of the annual loan payment that goes to interest (line B.8) is to multiply the interest rate by the size of the loan. To find the principal reduction in the loan balance (line B.7), simply subtract the amount that goes to interest from total annual mortgage payments. *Tax-shelter items."

Explanation / Answer

Soln : Asper the given annexure we have calculated the net values as given below:

Mortgage payment are calculated in excel by using the PMT formula, we get the monthly payments as $989.26

Annual payments = 989.26*12 = 11871.10

Annual interest payment = 6%*(175000-10000) = 9900, reduction in loan balance = 11871.10 - 9900 = 1971.10

From the table we can see that cost of renting > cost of buying

Least costly is cost of buying.

Year 1 Annual rental cost 9600 Renter Insurance 275 Opportunity cost of security deposit 32 Total cost of renting 9907.00 Cost of buying Annual mortgage payments 11871.10 property taxes 4375.00 Homeownerinsurance 875.00 Maintenance 1225.00 After tax cost of interest for downpayment and closing cost 568.00 Total cost 18914.10 Less principal reduction in loan balance 1971.10 tax savings due to interest deduction 2475.00 Tax saving due to property tax deduction 1093.75 Total deduction 5539.85 Annual after tax cost of home ownership 13374.25 Estimated annual appreciation 5250.00 Total cost of buying 8124.25

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