Question

Annual rent $ 7,380
Insurance 145
Security deposit 650
Annual mortgage payments $9,800 ($9,575 is interest)
Property taxes 1,780
Insurance/maintenance 1,050
Down payment/closing costs 4,500 Growth in equity 225
Estimated annual appreciation 1,700

Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent.

a) Calculate the total rental cost and total buying cost. (Round your intermediate calculations and final answers to the nearest whole number.)
b) Would you recommend buying or renting?

Answer 1

Answer:

Part A:

Rent = $7380

Mortgage payments = $9800

Insurance = $145

Taxes, insurance, maintenance = $1780+1050$ = $2830

Loss of Interest on security deposit = (650*6%) = $39

Interest lost on down payment and closing cost = (4,500*6%) = $270

Growth in equity = $225

Annual appreciation = $1700

Tax savings for mortgage interest = (9,575*28%) = $2,681

Tax savings for property taxes = (1,780*28%) = $498

Total rental cost = $7,380+145+39=7,564$ dollars

Total buying costs = $9,800+2,830+270-225-1,700-2,681-498=7,796$ dollars

Part B:

You should consider rent because the cost of renting is less than the cost of buying.