Case Study

Read the Case Study, "Is Owning a Home a Net Gain or Net Loss Over Time" on page 127.

Analyze Case Study Exercises 1

What decision should the Carroltons make and why?

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CASE STUDY

IS OWNING A HOME A NET GAIN OR NET LOSS OVER TIME?

Background

The Carroltons are deliberating whether to purchase a house or continue to rent for the next 10 years. They are assured by both of their employers that no transfers to new locations will occur for at least this number of years. Plus, the high school that their children attend is very good for their college prep education, and they all like the neighborhood where they live now.

They have a total of $40,000 available now and estimate that they can afford up to $2850 per month for the total house payment.

If the Carroltons do not buy a house, they will continue to rent the house they currently occupy for $2700 per month. They will also place the $40,000 into an investment instrument that is expected to earn at the rate of 6% per year. Additionally, they will add to this investment at the end of each year the same amount as the monthly 15-year mortgage payments. This alternative is called the rentdont buy plan.

Information

Two financing plans using fixed-rate mortgages are currently available. The details are as follows.

Plan	Description
A	30-year fixed rate of 5.25% per year interest; 10% down payment
B	15-year fixed rate of 5.0% per year interest; 10% down payment

Other information:

Price of the house is $330,000.

Taxes and insurance (T&I) are $500 per month.

Up-front fees (origination fee, survey fee, attorneys fee, etc.) are $3000.

Any money not spent on the down payment or monthly payment will be invested and return at a rate of 6% per year (0.5% per month).

The Carroltons anticipate selling the house after 10 years and plan for a 10% increase in price, that is, $363,000 (after all selling expenses are paid).