Question

Emma Sanchez is currently renting an apartment for $725 per month and paying $275 annually for renter’s insurance. She just found a small townhouse she can buy for $185,000. She has enough cash for a $10,000 down payment and $4,000 in closing costs. Her bank is offering 30-year mortgages at 5 percent per year. Emma estimated the following costs as a percentage of the home’s price: property taxes, 2.5 percent; homeowner’s insurance, 0.5 percent; and maintenance, 0.7 percent. She is in the 22 percent tax bracket and does not plan to itemize deductions on her taxes. Emma estimates that the value of the home will appreciate 2 percent per year.

Answer 1

Answer:

Annual Cost of Rent: $725*12=8700

Add: Renter's Insurance=$275

Total Cost=$8,975

Now if she purchased a house then let's see how much annual cost she need to bear:

EMI=$185000-$10,000=$175000/Total PVIF @5% for 30Years

EMI=$939.44

Hence. Annually it would be $939.44*12=$11273.28

So, it is quite clear that by purchasing the owned home Emma needs to bear extra cost of $2298.28 per year apart from the yearly expenditure that is property taxes insurance and maintenance which is of 10% of total cost of the house that is $18,500($185000*10%).

Hence, to purchase a house is not feasible and to go for the rent option is more viable for Emma.