Question
Derek and Meagan Jacoby recently graduated from State University, and Derek accepted a job in business consulting while Meagan accepted a job in computer programming.
Derek and Meagan Jacoby recently graduated from State University, and Derek accepted a job in business consulting while Meagan accepted a job in computer programming. Meagan inherited $75,000 from her grandfather, who recently passed away. The couple is debating whether they should buy or rent a home. They located a rental home that meets their needs. The monthly rent is $2,250. They also found a three-bedroom home that would cost $475,000 to purchase. The Jacobys could use Meagans inheritance for a down payment on the home. Thus, they would need to borrow $400,000 to acquire the home. They have the option of paying 2 discount points to receive a fixed interest rate of 2.5 percent on the loan or paying no points and receiving a fixed interest rate of 3.75 percent for a 30-year fixed loan. Though anything could happen, the couple expects to live in the home for no more than five years before relocating to a different region of the country. Derek and Meagan dont have any school-related debt, so they will save the $75,000 if they dont purchase a home. Also, consider the following information:
- The couples marginal tax rate is 24 percent.
- Regardless of whether they buy or rent, the couple will itemize their deductions and have the ability to deduct all of the property taxes from the purchase of a residence.
- If they buy, the Jacobys would purchase and move into the home on January 1, 2021.
- If they buy the home, the property taxes for the year are $3,600.
- Disregard loan-related fees not mentioned above.
- If the couple does not buy a home, they will put their money into their taxable annuity account, where they earn 5 percent annual interest.
- Assume that all unstated costs are equal between the buy and rent options.
Required: Help the Jacobys with their decisions by answering the following questions: (Leave no answer blank. Enter zero if applicable.)
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Comprehensive Problem 14-68 (LO 14-1, LO 14-2, LO 14-3, LO 14-4, LO 14-5, LO 14-6) (Static)
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[The following information applies to the questions displayed below.] Derek and Meagan Jacoby recently graduated from State University, and Derek accepted a job in business consulting while Meagan accepted a job in computer programming. Meagan inherited $75,000 from her grandfather, who recently passed away. The couple is debating whether they should buy or rent a home. They located a rental home that meets their needs. The monthly rent is $2,250. They also found a three-bedroom home that would cost $475,000 to purchase. The Jacobys could use Meagans inheritance for a down payment on the home. Thus, they would need to borrow $400,000 to acquire the home. They have the option of paying 2 discount points to receive a fixed interest rate of 2.5 percent on the loan or paying no points and receiving a fixed interest rate of 3.75 percent for a 30-year fixed loan. Though anything could happen, the couple expects to live in the home for no more than five years before relocating to a different region of the country. Derek and Meagan dont have any school-related debt, so they will save the $75,000 if they dont purchase a home. Also, consider the following information:
- The couples marginal tax rate is 24 percent.
- Regardless of whether they buy or rent, the couple will itemize their deductions and have the ability to deduct all of the property taxes from the purchase of a residence.
- If they buy, the Jacobys would purchase and move into the home on January 1, 2021.
- If they buy the home, the property taxes for the year are $3,600.
- Disregard loan-related fees not mentioned above.
- If the couple does not buy a home, they will put their money into their taxable annuity account, where they earn 5 percent annual interest.
- Assume that all unstated costs are equal between the buy and rent options.
Required: Help the Jacobys with their decisions by answering the following questions: (Leave no answer blank. Enter zero if applicable.)
b. What is the approximate break-even point in years (or months) for paying the points to receive a reduced interest rate? (To simplify this computation, assume the Jacobys will make interest-only payments, and ignore the time value of money.) (Do not round intermediate calculations. Round your final answer to 1 decimal place.)
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