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In: Finance

Josh and Juliette are deciding if they are ready to move in together and commit to...

Josh and Juliette are deciding if they are ready to move in together and commit to a home. They are currently renting a floor in student housing at a cost of $1,500 a month. The property they are considering purchasing will cost $350,000. They have a down payment of $70,000.They will only live there for 3 years before upgrading because their degrees will allow them to earn a sizable income. The current mortgage rate is 3.15% that is offered by their financial institution. They would amortize the mortgage for a period of 20 years with monthly payments. Juliette’s net income is $36,250 and Josh’s net income is $42,875. Other costs associated with owning the property are as follows: $2,250 p.a. for property taxes; $800 p.a. for insurance and a monthly maintenance fee of $500. All expenses as well as home values are expected to increase at a rate of 2% p.a.. They can earn a return of 5% p.a.. a) Is it a good time for them to buy or should they continue to rent? Ignore moving and legal expenses. b) Name 2 other things they should consider in their rent vs. buy decision.

Solutions

Expert Solution

As Josh and Juliette are planning for this house for only 3 years all calculations are amde for first 3 years

Please find below amortization schedule for first 3 years

Expenses for first 3 years are as per below table

Loan amount remaining = Initial Loan - Loan paid in 3 years

= (Cost of house - downpayment) - Loan principle paid in 3 years ( Refer amortization schedule for 3 years)

= 350000 - 70000 - 31633 = 248367

After end of 3 years total amount spend = 154360 + 248367 = 402727

Returns earned on house after selling it after 3 years = 350000 * 1.05 * 1.05 *1.05 = 405168.8

As returns > total amount spend for 3 years. and also whole rent will be saved for 3 years they should buy house.

Other points are

1) They should be able to make downpayment

2) They should check how liquid is market so that house could be sold after 3 years.


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