Chapter 8, Problem 5DC2

With a raise from his investment firm, Seyed Abdallah, 31, is inspired to look for a new home. Buying a home will allow Seyed, who is single and in the 25 percent marginal tax bracket, to itemize taxes. He has come to you for help.

Financially, he is fairly secure, but he is also very risk averse. His salary is $63,000 a year, but he does not know how much he should spend on housing. His current housing expenditures include rent of $900 per month and renter's insurance premiums totaling $150 per year. His monthly bills include a $450-per-month lease payment for his 2014 Acura TL and a $150-per-month student loan payment. He also paid a security deposit of 2 months’ rent from which he could be earning B percent after taxes.

Seyed has researched the recurring costs of home ownership. He has found that the real estate tax rate is $0.91 per $100 of assessed value and homeowners insurance policies cost approximately $275 per year. He is unsure of the maintenance costs but estimates them at $350 per year.

He likes the idea of owning his own home because as real estate values increase, the value of his home will increase instead of his rent payment. Local property values have been increasing at 5 percent per year over the last 7 years, and real estate sales commissions equal 6 percent of the purchase price. One of his concerns about buying a home is the immediate cost of the down payment and closing costs. These closing costs, he has found, include a 1 percent origination fee, two discount points on the mortgage, and 3 percent of the home purchase price in various other fees due at closing. He also knows that he will pay a 20 percent down payment up front to qualify for ?nancing. Another concern is the lost investment income on this money, which is currently earning an 8 percent alter-tax return.

5. Complete Worksheet lo to determine if Seyed should buy or continuerenting. To purchase the house considered in Question 4, Seyed wouldpay $6,000 in closing costs, including $2,500 in discount points. Consider1- and 7-year time horizons.