10. Rent versus buy analysis - Part 2Which Is Better: To Rent or To Buy?The decision of whether to rent or buy housing is a personal decision that is based on both your lifestyle and your finances. While most financialexperts argue that the financial aspect of the decision is important, it is also important not to base your rent-or-buy decision solely on the numbers.Your personal needs and housing market conditions are important.However, it is still necessary to perform the financial analysis.Megan and her husband are trying to decide whether to rent or to purchase a new condominium. After looking for several months, they've narrowedtheir choice down to one particular unit, and the builder is willing to lease or sell-depending upon the preference of the buyer.To perform a rent-or-buy analysis, Megan and her husband have collected the following information:• If they rent, the builder will require monthly rental payments of $1,100 and a security deposit equal to two months of rent.• Since they want to be protected against the possible loss of their possessions, they will purchase a renters' policy of $200 every sixmonths, while a more comprehensive homeowners' policy will cost 0.5% of the home's value per year.• Money used to fund the unit's security deposit could otherwise be invested to earn 3% per year after taxes. Funds expended for ahome's down payment and closing costs also incur an opportunity cost.• If the unit is purchased, it will cost $175,000 and will require a 20% down payment. The loan will carry an interest rate of 6%, a termof 30 years, and monthly payments of $839. The closing costs associated with the unit's mortgage will be $3,500.• The property taxes and the maintenance and repair expenses on the unit are estimated to be 3% and 1% of the unit's total price,respectively.• Your ordinary income is taxed at the rate of 28%, and you'll be willing to itemize your tax deductions in the event that you purchaseyour new home.• Financial publications report that home values are expected to increase by 3% this year due to inflation.Complete a rent-or-buy analysis worksheet to determine the total cost of renting and the total cost of purchasing Megan and her husband'sprospective house and then recommend their best strategy. To complete the worksheet, enter the appropriate values in their corresponding blanks andround each value to the nearest whole dollar. RENT-OR-BUY ANALYSIS FOR HOUSINGCOST OF RENTINGSecurity depositAnnual rental costRenter's insuranceOpportunity cost on security depositTotal Annual Cost of Renting:COST OF BUYINGMonthly mortgage paymentAnnual mortgage paymentsProperty taxesHomeowner's insuranceMaintenance expensesOpportunity cost of down payment and closing costsTotal costsLessReduction of loan principalTax savings on mortgage interest deductionTax saving on property tax deductionTotal deductionsAnnual after-tax cost of homeownershipEstimated annual appreciation in home valueTotal Annual Cost of Purchasing:Based on this analysis, Megan and her husband should:$ AmountO Purchase the home, as the total cost of purchasing is less than the cost of rentingPurchase the home, as the cost of purchasing is greater than the cost of rentingO Rent the home, as its total cost is less than the total cost of purchasing

Question

Accepted Answer

Rent or Buying:— In this Analysis we compute Cost of renting per year and cost of purchasing per…