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Angela Merkel is considering purchasing a $500,000 two bedroom condominium and living in it for 5 years. She has saved $150,000, which can be used
Angela Merkel is considering purchasing a $500,000 two bedroom condominium and living in it for 5 years. She has saved $150,000, which can be used for down payment and for closing costs. She will take out a mortgage loan to be amortized over 25 years. Interest rate on mortgage loan will be 3% per annum for the first 2 years and after that it will be 4% per year. Interest rate is compounded semiannually. Apart from monthly mortoa oe navments nther homenxinerchin encts are ectimated as follows: Alternatively, she can rent the condominium for $2,000/ month. Monthly rent of $2,000 includes property taxes, insurance, and condominium fees. She can invest her savings to earn an after tax rate of return of 2% p.a. It is expected that rent, property taxes, insurance premium, and condominium maintenance fees, will increase at 1% p.a. Real estate prices will continue to rise in the foreseeable future at an average rate of 3% or 5% per year. Probability that price will rise at 5% per year is 4 times as much as the probability that price will rise at 3% per year. Should she buy or rent? Angela Merkel is considering purchasing a $500,000 two bedroom condominium and living in it for 5 years. She has saved $150,000, which can be used for down payment and for closing costs. She will take out a mortgage loan to be amortized over 25 years. Interest rate on mortgage loan will be 3% per annum for the first 2 years and after that it will be 4% per year. Interest rate is compounded semiannually. Apart from monthly mortoa oe navments nther homenxinerchin encts are ectimated as follows: Alternatively, she can rent the condominium for $2,000/ month. Monthly rent of $2,000 includes property taxes, insurance, and condominium fees. She can invest her savings to earn an after tax rate of return of 2% p.a. It is expected that rent, property taxes, insurance premium, and condominium maintenance fees, will increase at 1% p.a. Real estate prices will continue to rise in the foreseeable future at an average rate of 3% or 5% per year. Probability that price will rise at 5% per year is 4 times as much as the probability that price will rise at 3% per year. Should she buy or rent
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