Question

1. Based on the following data, would you recommend buying or renting? (LO 7.1) Rental Costs Buying Costs Annual rent, $7,380 Annual mortgage payments, $9,800 ($9,575 is interest) Insurance, $145 Property taxes, $1,780 Security deposit, $650 Down payment/closing costs, $4,500 Growth in equity, $225 Estimated annual appreciation, $1,700 Insurance/maintenance, $1,050 Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. Rental Costs Buying Costs Rent $7,380 Mortgage payments $9,800 Insurance 145 Taxes, insurance, maintenance 2,830 Interest lost on security deposit 39 Interest lost on down payment, closing costs 270 Growth in equity -225 Annual appreciation -1,700 Tax savings for mortgage interest -2,681 Tax savings for property taxes -498 Total rental costs $7,564 Total buying costs $7,796

Answer 1

Answer:

1

Explanation:

a. Let calculate the cost to rent

Buying Costs equal $7,380

Rent equal $9,800

Mortgage payments equal 145 Insurance equal $2,830

Since taxes, insurance, maintenance 39 Interest lost on security deposit and 270 Interest lost on down payment, with a closing costs of -225

Growth in equity equal 1,700

Annual appreciation equal 2,681

Tax savings for mortgage interest of 498

Tax savings for property taxes

$ 7,564

Total rental costs

$ 7,796 Total buying costs

Interest lost on security deposit = $650 × 0.06 = $39

Interest lost on down payment and closing cost = $4,500 × 0.06 = $270

Tax savings for mortgage interest = $9,575 × 0.28 = $2,681

Tax savings for property taxes = $1,780 × 0.28 = $498

(b) cost of renting is less than cost of buying, if cost is the only criteria, renting is better.