Chapter 13.4, Problem 56E

Exercises 55 and 56 refer to the When Will I Ever Use This?feature at the end of this section. Suppose your clients can afford to buy a $200,000 home and have the required 20% down payment in savings. Comparable rentals are available for $900 per month. Assume a combined income tax bracket of 25%, and a return on investments of 4%, with a 15% tax rate on capital gains. Compare the costs of buying and renting under the given circumstances.

Seeing the savings associated with home ownership, your clients now are considering staying in the area for 20 years. If they decided to purchase the home, they would take out a 30-year fixed mortgage at 4.5%. If home values increase by 3% per year, and rents also increase 3% per year, determine

(a) the proceeds from the sale of the same home in 20 years.

(b) the total costs of 20 years of ownership, and

(c) the difference between the costs of renting and the costs of owning over 20 years.

Buying		Renting
Up-front Costs of Purchasing		Up-front Costs of Renting
Down Payment	$40,000	Rental deposit	S900
Closing Costs	$6,000
Recurring Costs		Recurring Costs
Mortgage payments	S166.369	Rent	$290,200
Other	$87,425	Renter's insurance	$5,804
Opportunity Costs		Opportunity Costs
Up-front costs	$43,778	Initial rent deposit	$857
Yearly costs	S104.715	Yearly costs	SI 12.388
Selling Costs		Terminating Agreement
Selling costs	S21.673	Return of deposit	-5900
Remaining principal	$78,224
Proceeds from sale
Total Costs for 20 Years_______________		Total Costs for 20 Y ears	$409,249