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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

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

Essentials Of Investments
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
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fill out the worksheet using the following information:

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%
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'
Transcribed Image Text: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'
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