Question

Given:

Sales Price:                              $250,000

Marginal Tax Rate                   30%

Property Taxes (monthly)       200

Insurance (monthly)                50

Cost to Rent an Apt.                1,000

Down Payment                       20%

Mortgage Interest Rate            7.5%

Amortization Period                30 yrs.

What are the financial implications of renting or buying a home given the above data? Calculate on a monthly basis. (Hint: What is the after tax cost of buying the home compared to renting the apt?)

If possible, please use a financial calculator and show me how to solve as I need to learn this concept for this class.

Answer 1

Solution:

Finacial Implications About Renting (Or) Buying a a Home

*Down Payment = 0.2250,000 = $ 50,000

*Mortgage = $200,000

*No. of Periods = 1230 = 360

*Mortgage payment monthly = $1398.43

{ use Excel function PMT(7.5%/12 , 360, 200000)}

*Total Mortgage Payments = 1398.43*360

= 503434.45

* Property Tax for 360 periods = 72000

* Insurance        = 50*360

= 18000

*nterest Paid = Total Mortgage paid -   Actual Mortgage

= 503434.45 - 200000

= 303434.45

*Tax Savings from Interest = 0.35303434.45 = 91030.335

*Tax Savings from Property Taxes = 0.35*72,000

= 21,600

* Total Net Costs for 360 periods-

                              = 50000 + 503434.45 +72000+18000-91030.335-21600

                               = 530804.1

* Average Monthly costs = 530804.1/360

= $1474.46

*Average Monthly rent = $1000

It seems that Renting is more Apt than buying a home but here I have not considered anything about value of house (i.e. it can be sold after 30 years).

Let us assume that the value of house after 30 years is same and it can be sold at = $250,000

Then Net Costs            = 530804.1 – 250000

= 280804.1

Average monthly costs = $780.01

So Finally,In this case buying a house will be more beneficial than renting.