Rent or Buy a House You are staying in Raleigh! With a post-graduation career in the Triangle, you need a place to live. A move-in ready townhouse is $300,000 using a 20-year mortgage and putting 10% as a cash down payment (i.e., you only need to finance 90% of the purchase price). The current interest rate you have available is a 4.25% APR compounded monthly. "Closing costs," that is, transaction costs associated with purchasing the house, are 2% of the purchase price. Suppose, you expect home values in Raleigh to continue to grow at 2.5% per year. Finally, if you were to sell the home, you would realize 5% in fees (costs of a realtor and associated transaction costs). Alternatively, you can rent an apartment for $1,900 per month. There is a $3,000 security deposit, due at the time you move in. Assume that the cost of the rental increases 15% every five years. Mortgage and rental payments are made at the end of every month. Assuming you will live in this location for 10 years (i.e., you sell the house or stop renting at that time), find the implied cost of the rental. Do you rent or do you buy? (You can find NPV at the rental rate or the implied interest cost of the lease. For both of these, you need some cash flows!) Pay attention to formatting and do not hardcode numbers into your formulas. Home value time 0 oan amount nterest rate Loan term ayment Closing costs time 0 Eent time 0 security deposit Home value year 10
Rent or Buy a House You are staying in Raleigh! With a post-graduation career in the Triangle, you need a place to live. A move-in ready townhouse is $300,000 using a 20-year mortgage and putting 10% as a cash down payment (i.e., you only need to finance 90% of the purchase price). The current interest rate you have available is a 4.25% APR compounded monthly. "Closing costs," that is, transaction costs associated with purchasing the house, are 2% of the purchase price. Suppose, you expect home values in Raleigh to continue to grow at 2.5% per year. Finally, if you were to sell the home, you would realize 5% in fees (costs of a realtor and associated transaction costs). Alternatively, you can rent an apartment for $1,900 per month. There is a $3,000 security deposit, due at the time you move in. Assume that the cost of the rental increases 15% every five years. Mortgage and rental payments are made at the end of every month. Assuming you will live in this location for 10 years (i.e., you sell the house or stop renting at that time), find the implied cost of the rental. Do you rent or do you buy? (You can find NPV at the rental rate or the implied interest cost of the lease. For both of these, you need some cash flows!) Pay attention to formatting and do not hardcode numbers into your formulas. Home value time 0 oan amount nterest rate Loan term ayment Closing costs time 0 Eent time 0 security deposit Home value year 10
Chapter9: Obtaining Affordable Housing
Section: Chapter Questions
Problem 2DTM
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Transcribed Image Text:You are staying in Raleigh! With a post-graduation career in the Triangle, you need a place to live. A move-in ready townhouse is $300,000 using a 20-year mortgage and putting
10% as a cash down payment (i.e., you only need to finance 90% of the purchase price). The current interest rate you have available is a 4.25% APR compounded monthly. "Closing
costs," that is, transaction costs associated with purchasing the house, are 2% of the purchase price. Suppose, you expect home values in Raleigh to continue to grow at 2.5% per
year. Finally, if you were to sell the home, you would realize 5% in fees (costs of a realtor and associated transaction costs). Alternatively, you can rent an apartment for $1,900 per
month. There is a $3,000 security deposit, due at the time you move in. Assume that the cost of the rental increases 15% every five years.
Mortgage and rental payments are made at the end of every month. Assuming you will live in this location for 10 years (i.e., you sell the house or stop renting at that time), find the
implied cost of the rental. Do you rent or do you buy? (You can find NPV at the rental rate or the implied interest cost of the lease. For both of these, you need some cash flows!)
Pay attention to formatting and do not hardcode numbers into your formulas.
Home value time 0
Loan amount
Interest rate
Loan term
Payment
Closing costs time 0
Rent time 0
Security deposit
Home value year 10
Month
Rent or Buy a House
Mortgage CF
Rental CF
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