Concept explainers
Exercises 55 and 56 refer to the When Will I Ever Use This?feature at the end of this section. Suppose your clients can afford to buy a $200,000 home and have the required 20% down payment in savings. Comparable rentals are available for $900 per month. Assume a combined income tax bracket of 25%, and a return on investments of 4%, with a 15% tax rate on capital gains. Compare the costs of buying and renting under the given circumstances.
Seeing the savings associated with home ownership, your clients now are considering staying in the area for 20 years. If they decided to purchase the home, they would take out a 30-year fixed mortgage at 4.5%. If home values increase by 3% per year, and rents also increase 3% per year, determine
(a) the proceeds from the sale of the same home in 20 years.
(b) the total costs of 20 years of ownership, and
(c) the difference between the costs of renting and the costs of owning over 20 years.
Buying | Renting | ||
Up-front Costs of Purchasing | Up-front Costs of Renting | ||
Down Payment | $40,000 | Rental deposit | S900 |
Closing Costs | $6,000 | ||
Recurring Costs | Recurring Costs | ||
Mortgage payments | S166.369 | Rent | $290,200 |
Other | $87,425 | Renter's insurance | $5,804 |
Opportunity Costs | Opportunity Costs | ||
Up-front costs | $43,778 | Initial rent deposit | $857 |
Yearly costs | S104.715 | Yearly costs | SI 12.388 |
Selling Costs | Terminating Agreement | ||
Selling costs | S21.673 | Return of deposit | -5900 |
Remaining principal | $78,224 | ||
Proceeds from sale | |||
Total Costs for 20 Years_______________ | Total Costs for 20 Y ears | $409,249 |
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