fill in the blanks using this information: Theoretical Housing Situation:Renting:Monthly Rent: $1,800Renter’s Insurance: $200 per yearSecurity Deposit: $2,000After-tax Savings Rate: 5%Buying:Home Price: $250,000Down Payment: $50,000Loan Amount: $200,000Loan Term: 25 yearsInterest Rate: 3.5%Property Taxes: 1.25% of the home priceHomeowner’s Insurance: 0.4% of the home priceMaintenance Costs: 1.5% of the home priceClosing Costs: $5,000After-tax Rate of Return: 4%Tax Rate: 25%Estimated Annual Appreciation: 2%Now, fill in the worksheet:A. COST OF RENTING:Annual Rental Costs (Line A.1):12×$1,800=$21,60012×$1,800=$21,600Renter’s Insurance (Line A.2):$200Opportunity Cost of Security Deposit (Line A.3):$2,000×0.05=$100$2,000×0.05=$100Total Cost of Renting (Line A.1 + Line A.2 + Line A.3):$21,600+$200+$100=$21,900$21,600+$200+$100=$21,900B. COST OF BUYING:Annual Mortgage Payments (Line B.1):Use a mortgage calculator to find the monthly mortgage payment and then multiply by 12.Property Taxes (Line B.2):$250,000×0.0125=$3,125$250,000×0.0125=$3,125Homeowner’s Insurance (Line B.3):$250,000×0.004=$1,000$250,000×0.004=$1,000Maintenance (Line B.4):$250,000×0.015=$3,750$250,000×0.015=$3,750After-Tax Cost of Interest on Down Payment and Closing Costs (Line B.5):$5,000×0.04=$200$5,000×0.04=$200Total Costs (Line B.6):Sum of Lines B.1 through B.5.Principal Reduction in Loan Balance (Line B.7):Follow the note's instructions to find this value.Tax Savings Due to Interest Deductions (Line B.8):Interest portion of mortgage payments×Tax rateInterest portion of mortgage payments×Tax rateTax Savings Due to Property Tax Deductions (Line B.9):Property taxes×Tax rateProperty taxes×Tax rateTotal Deductions (Line B.10):Sum of Lines B.7 through B.9.Annual After-Tax Cost of Home Ownership (Line B.11):Line B.6 - Line B.10Line B.6 - Line B.10Estimated Annual Appreciation in Value of Home (Line B.12):$250,000×0.02=$5,000$250,000×0.02=$5,000Total Cost of Buying (Line B.11 - Line B.12):Line B.11 - Line B.12Line B.11 - Line B.12 A. COST OF RENTING1. Annual rental costs( 12 x monthly rental rate of $2. Renter's insurance3. Opportunity cost of security deposit:B. COST OF BUYINGTotal cost of renting (line A.1 + line A.2 + line A.3)1. Annual mortgage payments (Terms:( 12 x monthly mortgage payment of2. Property taxes% of price of home)3. Homeowner's insurance% of price of home)4. MaintenanceLess:% of price of home)6. Total costs (sum of lines B.1 through B.5)5. After-tax cost of interest on down payment and closing costs( $8. Tax savings due to interest deductions*(Interest portion of mortgage payments9. Tax savings due to property tax deductions*(line B.2 x tax rate of7. Principal reduction in loan balance (see note below)10. Total deductions (sum of lines B.7 through B.9)$11. Annual after-tax cost of home ownership(line B.6-line B.10)$$12. Estimated annual appreciation in value of home(% of price of home)Total cost of buying (line B.11-line B.12)% after-tax rate of return)$RENT-OR-BUY ANALYSIS%)x after-tax savings ratex tax rate ofmonths,%)%)$Note: Find monthly mortgage payments from the Exhibit in chapter 5 of your textbook. An easy way to approximate the portion of theannual loan payment that goes to interest (line B.8) is to multiply the interest rate by the size of the loan.To find the principal reduction in the loan balance (line B.7), simply subtract the amount that goes tointerest from total annual mortgage payments.*Tax-shelter items.$$$$$I'

The objective of this question is to calculate the cost of renting versus buying a home using the provided information.First, we calculate the cost of renting. The annual rental cost is the monthly rent multiplied by 12, which is $1,800 x 12 = $21,600. The renter's insurance is given as $200. The opportunity cost of the security deposit is the security deposit multiplied by the after-tax savings rate, which is $2,000 x 0.05 = $100. The total cost of renting is the sum of these three costs, which is $21,600 + $200 + $100 = $21,900.Next, we calculate the cost of buying. The property taxes are the home price multiplied by the property tax rate, which is $250,000 x 0.0125 = $3,125. The homeowner's insurance is the home price multiplied by the homeowner's insurance rate, which is $250,000 x 0.004 = $1,000. The maintenance cost is the home price multiplied by the maintenance cost rate, which is $250,000 x 0.015 = $3,750. The after-tax cost of interest on the down payment and closing costs is the closing costs multiplied by the after-tax rate of return, which is $5,000 x 0.04 = $200.To calculate the annual mortgage payments (Line B.1), we would need to use a mortgage calculator. For the purpose of this exercise, let's assume that the annual mortgage payments are $12,000.The total costs (Line B.6) is the sum of the annual mortgage payments, property taxes, homeowner's insurance, maintenance costs, and the after-tax cost of interest on the down payment and closing costs. This would be $12,000 + $3,125 + $1,000 + $3,750 + $200 = $20,075.The principal reduction in the loan balance (Line B.7) can be calculated by subtracting the amount that goes to interest from the total annual mortgage payments. The amount that goes to interest can be approximated by multiplying the interest rate by the size of the loan, which is 0.035 x $200,000 = $7,000. Therefore, the principal reduction in the loan balance is $12,000 - $7,000 = $5,000.The tax savings due to interest deductions (Line B.8) is the interest portion of the mortgage payments multiplied by the tax rate, which is $7,000 x 0.25 = $1,750. The tax savings due to property tax deductions (Line B.9) is the property taxes multiplied by the tax rate, which is $3,125 x 0.25 = $781.25.The total deductions (Line B.10) is the sum of the principal reduction in the loan balance, tax savings due to interest deductions, and tax savings due to property tax deductions. This would be $5,000 + $1,750 + $781.25 = $7,531.25.The annual after-tax cost of home ownership (Line B.11) is the total costs minus the total deductions, which is $20,075 - $7,531.25 = $12,543.75.The estimated annual appreciation in the value of the home (Line B.12) is the home price multiplied by the estimated annual appreciation rate, which is $250,000 x 0.02 = $5,000.Finally, the total cost of buying (Line B.13) is the annual after-tax cost of home ownership minus the estimated annual appreciation in the value of the home, which is $12,543.75 - $5,000 = $7,543.75.In this scenario, the total cost of renting a home for a year is $21,900, while the total cost of buying a home, after considering all costs, deductions, and the estimated annual appreciation in the value of the home, is $7,543.75. Therefore, buying a home would be more cost-effective than renting in this case.

A. COST OF RENTING 1. Annual rental costs ( 12 x monthly rental rate of $ 2. Renter's insurance 3. Opportunity cost of security deposit: B. COST OF BUYING Total cost of renting (line A.1 + line A.2 + line A.3) 1. Annual mortgage payments (Terms: ( 12 x monthly mortgage payment of 2. Property taxes % of price of home) 3. Homeowner's insurance % of price of home) 4. Maintenance Less: % of price of home) 6. Total costs (sum of lines B.1 through B.5) 5. After-tax cost of interest on down payment and closing costs ( $ 8. Tax savings due to interest deductions* (Interest portion of mortgage payments 9. Tax savings due to property tax deductions* (line B.2 x tax rate of 7. Principal reduction in loan balance (see note below) 10. Total deductions (sum of lines B.7 through B.9) $ 11. Annual after-tax cost of home ownership (line B.6-line B.10) $ $ 12. Estimated annual appreciation in value of home ( % of price of home) Total cost of buying (line B.11-line B.12) % after-tax rate of return) $ RENT-OR-BUY ANALYSIS %) x after-tax savings rate x tax rate of months, %) %) $ Note: Find monthly mortgage payments from the Exhibit in chapter 5 of your textbook. An easy way to approximate the portion of the annual loan payment that goes to interest (line B.8) is to multiply the interest rate by the size of the loan. To find the principal reduction in the loan balance (line B.7), simply subtract the amount that goes to interest from total annual mortgage payments. *Tax-shelter items. $ $ $ $ $ I'

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Theoretical Housing Situation:

Renting:

Monthly Rent: $1,800
Renter’s Insurance: $200 per year
Security Deposit: $2,000
After-tax Savings Rate: 5%

Buying:

Home Price: $250,000
Down Payment: $50,000
Loan Amount: $200,000
Loan Term: 25 years
Interest Rate: 3.5%
Property Taxes: 1.25% of the home price
Homeowner’s Insurance: 0.4% of the home price
Maintenance Costs: 1.5% of the home price
Closing Costs: $5,000
After-tax Rate of Return: 4%
Tax Rate: 25%
Estimated Annual Appreciation: 2%

Now, fill in the worksheet:

A. COST OF RENTING:

Annual Rental Costs (Line A.1):
- 12×$1,800=$21,60012×$1,800=$21,600
Renter’s Insurance (Line A.2):
- $200
Opportunity Cost of Security Deposit (Line A.3):
- $2,000×0.05=$100$2,000×0.05=$100
Total Cost of Renting (Line A.1 + Line A.2 + Line A.3):
- $21,600+$200+$100=$21,900$21,600+$200+$100=$21,900

B. COST OF BUYING:

Annual Mortgage Payments (Line B.1):
- Use a mortgage calculator to find the monthly mortgage payment and then multiply by 12.
Property Taxes (Line B.2):
- $250,000×0.0125=$3,125$250,000×0.0125=$3,125
Homeowner’s Insurance (Line B.3):
- $250,000×0.004=$1,000$250,000×0.004=$1,000
Maintenance (Line B.4):
- $250,000×0.015=$3,750$250,000×0.015=$3,750
After-Tax Cost of Interest on Down Payment and Closing Costs (Line B.5):
- $5,000×0.04=$200$5,000×0.04=$200
Total Costs (Line B.6):
- Sum of Lines B.1 through B.5.
Principal Reduction in Loan Balance (Line B.7):
- Follow the note's instructions to find this value.
Tax Savings Due to Interest Deductions (Line B.8):
- Interest portion of mortgage payments×Tax rateInterest portion of mortgage payments×Tax rate
Tax Savings Due to Property Tax Deductions (Line B.9):
- Property taxes×Tax rateProperty taxes×Tax rate
Total Deductions (Line B.10):
- Sum of Lines B.7 through B.9.
Annual After-Tax Cost of Home Ownership (Line B.11):
- Line B.6 - Line B.10Line B.6 - Line B.10
Estimated Annual Appreciation in Value of Home (Line B.12):
- $250,000×0.02=$5,000$250,000×0.02=$5,000
Total Cost of Buying (Line B.11 - Line B.12):
- Line B.11 - Line B.12Line B.11 - Line B.12

AI-Generated Solution

AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.

Unlock instant AI solutions

Tap the button
to generate a solution

Click the button to generate
a solution

SEE SOLUTION