3. Rent Versus Buy. Phillip Guadet of Monroe, Louisiana, has been renting a small, two-bedroom house for several years. He pays $950 per month in rent for the home and

$300 per year in property and liability insurance. The owner of the house wants to sell it, and Phillip is considering making an off er. The owner wants $130,000 for the property, but Phillip thinks he could get the house for

$120,000 and use his $25,000 in 5 percent certifi cates of deposit that are ready to mature for the down payment.

Phillip has talked to his banker and could get a 7 percent mortgage loan for 25 years to fi nance the remainder of the purchase price. The banker advised Phillip that he would reduce his debt principal by $1850 during the fi rst year of the loan. Property taxes on the house are

$1800 per year. Phillip estimates that he would need to upgrade his property and liability insurance to $500 per year and would incur about $1000 in costs the fi rst year for maintenance. Property values are increasing at about 3.5 percent per year in the neighborhood. Phillip is in the 25 percent marginal tax bracket.

(a) Use Table 9.4 to calculate the monthly mortgage payment for the mortgage loan that Phillip would need.

(b) How much interest would Phillip pay during the fi rst year of the loan?

(c) Use the Run the Numbers worksheet, “Should You Buy or Rent?” on page 251 to determine whether Phillip would be better off buying or renting based on his cash fl ow.