Rent Or Buy Analysis

With procedure for making the rent-or-buy decision, you should rent if the total cost of renting is less than the total cost of buying or buy if the total cost of renting more than the total cost buying.

Details:

Rent: Monthly payment of $900/m

Buying the Condo: Location mid town Houston – Cost=$200,000; Down Payment=$40,000; Mortgage=$160,000, 30 yr fixed at 3.5%. Additional costs of $4500. Property Tax rate of 2%; homeowners insurance of .5%; maintenance .8%; association fees $200/m; after-tax rate of return on your investments 3%. Home appreciation ( gain in value ) 2%

In this scenario do you rent or buy?

Complete worksheet 5.2 and submit to dropbox. Make sure you make the recommendation.

ws_05.2

RENT-OR-BUY ANALYSIS
A.COST OF RENTING
1.Annual rental costs
(12× monthly rental rate of$)$ – 0
2.Renter’s insurance
3.Opportunity cost of security deposit: $× after-tax savings rate– 0
Total cost of renting (line A.1 + line A.2 + line A.3)$ – 0
B.COST OF BUYING
0.Price of home$
1.Annual mortgage payments (Terms: $,months,%)$ – 0
(12× monthly mortgage payment of$ – 0)
2.Property taxes– 0
(% of price of home)
3.Homeowner’s insurance– 0
(% of price of home)
4.Maintenance– 0
(% of price of home)
5.After-tax cost of interest on down payment and closing costs– 0
($×% after-tax rate of return)
6.Total costs (sum of lines B.1 through B.5)$ – 0
Less:
7.Principal reduction in loan balance (see note below)$ – 0
8.Estimated annual appreciation in home value– 0
(% of price of home)
9.Total deductions (sum of lines B.7 through B.8)– 0
Total cost of buying (line B.6 – line B.9)$ – 0
Note: Find monthly mortgage payments using a calculator or Exhibit 5.5. An easy way to approximate the portion of the annual loan payment that goes to interest is to multiply the interest rate by the size of the loan. Then, to find the principal reduction in the loan balance (line B.7), simply subtract the amount that goes to interest from total annual mortage payment.

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