Question

In: Finance

Patricia has been renting a two bedroom house for years. She pays $1000 per month in...

  1. Patricia has been renting a two bedroom house for years. She pays $1000 per month in rent for the apartment and $400 per year in property and liability insurance. The owner of the house wants to sell it, and Patricia is considering making an offer. The owner wants $180,000 for the property, but Patricia thinks she could get the house for $170,000 and use her $20,000 in 3% CDs that are ready to mature for the down payment. Patricia has talked to her bank and could get a 4.5% mortgage loan for 30 years to finance the remainder of the purchase price. Property taxes on the house are $2000 per year. Insurance would need to be upgraded to $900 a year and Patricia would incur about $1000 in costs the first year for maintenance. Property values are increasing at about 2% per year in the neighborhood. Patricia is in the 25% marginal tax bracket.
  2. calculate the monthly mortgage payment for the mortgage loan.
  3. whether Patricia should continue renting or would she be better off buying the home. For any numbers not included in the scenario but are on the worksheet just leave blank.

Solutions

Expert Solution

Calculation of monthly mortgage payment for ML

Purchase price of house ( as per Patricia's cal.)= USD 170,000.

CDs 3% (since maturity period is not given, considered the maturity value) = USD 20,000

Considering the Bank will provide USD 150,000 with 4.5% for 30 years. ( zero bank charges for processing)

As per the calculation EMI will be : USD 760.00

Total payment: USD 273,610.00 (360 installments)

Total Interest Payable= USD 123,610.00 (Fed tax exemption can be availed)

Other Charges during first year = Property tax+ Insurance +Maintenance exp= (2000+900+1000) = USD 3,900

Second Year onwards = USD 2900

Total Rental Charges for next 30 years (Insurance excluded)= 12000* 30 years with 5% increase =USD 830,514.00

Total Mortgage payment = 273,610

Whether Patricia should continue renting or would she be better off buying the home?

It is better to buy the house apart from the rental cost benefit (see above calc), she may able to avail property appreciation and Fed tax benefit.


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