Critical Thinking Case $3$

Julie's Rent$-$or$-$Buy Decision

Julie Brown is a single woman in her late $20$s$.$ She is renting an apartment in the fashionable part of town for $$1,300$ a month. After much thought, she's seriously considering buying a condominium for $$175,000.$

She intends to put $20$ percent down and expects that closing costs will amount to another $$5,000$; a commercial bank has agreed to lend her money at the fixed rate of $6$ percent on a $15-$year mortgage. Julie would

have to pay an annual condominium owner's insurance premium of $$610$ and property taxes of $$1,300$ a year $($she$\text{'}$s now paying renter's insurance of $$550$ per year$).$ In addition, she estimates that annual

maintenance expenses will be about $0\mathrm{.}5$ percent of the price of the condo $($which includes a $$30$ monthly fee to the property owners' association$).$ Julie's income puts her in the $25$ percent tax bracket $($she itemizes

her deductions on her tax returns$),$ and she earns an after$-$tax rate of return on her investments of around $4$ percent.

Given the information provided, use Worksheet $5\mathrm{.}2$ to evaluate and compare Julie's alternatives of remaining in the apartment or purchasing the condo. Round the answers to the nearest dollar. $($Note:

Assume Julie's security deposit is equal to one month's rent.$)$ Round your answers to the nearest cent.

Annual ownership cost

Annual rental cost

$

$

Working with a friend who is a realtor, Julie has learned that condos like the one she's thinking of buying are appreciating in value at the rate of $3\mathrm{.}5$ percent a year and are expected to continue doing so$.$

Would such information affect the rent$-$or$-$buy decision made in Question $1?$

$Nov$

Fxnlain

Discuss any other factors that should be considered when making a rent$-$or$-$buy decision.

Which alternative would you recommend for Julie in light of your analysis?