Do the Math 9 3 Rent Versus Buy Alex Guadet of Nashville, Tennessee, has been renting a two bedroom house for several years. He pas 100 per month in rent for the home and $300 per year in property and ability insurance. The owner of the house wants to sell it, and Alex is considering making an offer. The owner wants $170,000 for the property, but Alex thinks he could get the house for $160,000 and use his $25,000 in 3 percent certificates of depost that are ready to mature for the down payment. Alex has talked to his banker and could get a 5 percent mortgage loan for 25 years to finance the remainder of the purchase price. The banker advised Alex that he would reduce his debt principal by $2,000 during the first year of the loan, Property taxes on the house are $1,400 per year. Alex estimates that he would need to upgrade his property and liability insurance to $1,200 per year and would incur about $2.000 in costs the first year for maintenance and improvements Property values are increasing at about 3 percent per year in the neighborhood. Alex will have to pay $50 a month for private mortgage insurance. He is in the 25 percent marginal tax bracket a. Use Table 9.4 to calculate the monthly mortgage payment for the mortgage loan that Alex would need. Round Estimating Mortgage Loan Payments for principal and interest in your intermediate calculations to four decimal places. Round your answer to the nearest cent. b. How much interest would Alex pay during the first year of the loan Round your answer to the nearest cent. c. Use the Run the Numbers worksheet 'Should You Buyor Rent to determine whether Alex would be better off buying or renting On the basis of net cost. Alex would be better of RUN THE NUMBERS Berg Should You Buy or Rent? This worksheet can be used to estimate whether you would be better off renting housing or buying. If you are renting an apartment and planning to buy a house, qualita- tive differences will enter into your decision. This worksheet will put the financial picture into focus. A similar worksheet can be found at www.finance.yahoo.com/calculator/ real-estate/hom06. DO IT IN CLASS Example Amounts Rent Buy Your Figures Rent Buy $12,000 $10,360 360 N/A NA ... 725 0 3,000 600 1,800 NA |||||| 720 NA Annual Cash-Flow Considerations Annual rent ($1,000/month) or mortgage payments (5863.35/month)* Property and liability insurance Private mortgage insurance Real estate taxes Maintenance Other housing fees Less interest earned on funds not used for down payment (at 2%) Cash-Flow Cost for the Year Tax and Appreciation Considerations Less principal repaid on the mortgage loan Plus tax on interest earned on funds not used for down payment (25% marginal tax bracket) Less tax savings due to deductibility of mortgage interest' (25% marginal tax bracket) Less tax savings due to deductibility of real estate property taxes (25% marginal tax bracket) Less appreciation on the dwelling (2.5% annual rate) Net Cost for the Year ||||| | 3| $11,640 $16,485 NA 180 1.768 NA NA 2,148 750 N/A $11,820 1,800 $10,019 || Calculated from Table 9-4 on page 285. Calculated according to the method illustrated in Table 9-2 on page 283 Mortgage interest tax savings equal total mortgage payments minus principal repaid multiplied by the marinatay Estimating Mortgage Loan Payments for Principal and Interest (Monthly Payment per $1,000 Borrowed) Interest Rate (%) 15 25 45 5.0 5.5 $6.9058 7.1488 7.3969 7.6499 7.9079 8.1708 8.4386 8.7111 8.9883 9.2701 9.5565 Payment Period (Years) 20 $5.5460 $4.7421 5.7996 5.0062 6.0598 5.2783 6.3265 5.5583 6.5996 5.8459 6.8789 6.1409 7.1643 6.4430 7.4557 6.7521 7.7530 7.0678 8.0559 7.3899 8.3644 30 $4.2160 4.4904 4.7742 5.0669 5.3682 5.6779 5.9955 6.3207 6.6530 6.9921 7.3376 6.0 6.5 7.0 7.5 8.0 Note: To use this table to figure a monthly mortgage payment, divide the amount borrowed by000 and multiply by the appropriate figure in the table for the interest rate and time period of the loan. For example, a $150.000 oan for 30 years at 60 percent would require a payment of $959,280 [(5160,000 - 100059955 2 0 vears would require payment of $1,146.29 TI$ 160,000 1000) X 7.1643). For calculations for different intensit a te a man companion website Do the Math 9 3 Rent Versus Buy Alex Guadet of Nashville, Tennessee, has been renting a two bedroom house for several years. He pas 100 per month in rent for the home and $300 per year in property and ability insurance. The owner of the house wants to sell it, and Alex is considering making an offer. The owner wants $170,000 for the property, but Alex thinks he could get the house for $160,000 and use his $25,000 in 3 percent certificates of depost that are ready to mature for the down payment. Alex has talked to his banker and could get a 5 percent mortgage loan for 25 years to finance the remainder of the purchase price. The banker advised Alex that he would reduce his debt principal by $2,000 during the first year of the loan, Property taxes on the house are $1,400 per year. Alex estimates that he would need to upgrade his property and liability insurance to $1,200 per year and would incur about $2.000 in costs the first year for maintenance and improvements Property values are increasing at about 3 percent per year in the neighborhood. Alex will have to pay $50 a month for private mortgage insurance. He is in the 25 percent marginal tax bracket a. Use Table 9.4 to calculate the monthly mortgage payment for the mortgage loan that Alex would need. Round Estimating Mortgage Loan Payments for principal and interest in your intermediate calculations to four decimal places. Round your answer to the nearest cent. b. How much interest would Alex pay during the first year of the loan Round your answer to the nearest cent. c. Use the Run the Numbers worksheet 'Should You Buyor Rent to determine whether Alex would be better off buying or renting On the basis of net cost. Alex would be better of RUN THE NUMBERS Berg Should You Buy or Rent? This worksheet can be used to estimate whether you would be better off renting housing or buying. If you are renting an apartment and planning to buy a house, qualita- tive differences will enter into your decision. This worksheet will put the financial picture into focus. A similar worksheet can be found at www.finance.yahoo.com/calculator/ real-estate/hom06. DO IT IN CLASS Example Amounts Rent Buy Your Figures Rent Buy $12,000 $10,360 360 N/A NA ... 725 0 3,000 600 1,800 NA |||||| 720 NA Annual Cash-Flow Considerations Annual rent ($1,000/month) or mortgage payments (5863.35/month)* Property and liability insurance Private mortgage insurance Real estate taxes Maintenance Other housing fees Less interest earned on funds not used for down payment (at 2%) Cash-Flow Cost for the Year Tax and Appreciation Considerations Less principal repaid on the mortgage loan Plus tax on interest earned on funds not used for down payment (25% marginal tax bracket) Less tax savings due to deductibility of mortgage interest' (25% marginal tax bracket) Less tax savings due to deductibility of real estate property taxes (25% marginal tax bracket) Less appreciation on the dwelling (2.5% annual rate) Net Cost for the Year ||||| | 3| $11,640 $16,485 NA 180 1.768 NA NA 2,148 750 N/A $11,820 1,800 $10,019 || Calculated from Table 9-4 on page 285. Calculated according to the method illustrated in Table 9-2 on page 283 Mortgage interest tax savings equal total mortgage payments minus principal repaid multiplied by the marinatay Estimating Mortgage Loan Payments for Principal and Interest (Monthly Payment per $1,000 Borrowed) Interest Rate (%) 15 25 45 5.0 5.5 $6.9058 7.1488 7.3969 7.6499 7.9079 8.1708 8.4386 8.7111 8.9883 9.2701 9.5565 Payment Period (Years) 20 $5.5460 $4.7421 5.7996 5.0062 6.0598 5.2783 6.3265 5.5583 6.5996 5.8459 6.8789 6.1409 7.1643 6.4430 7.4557 6.7521 7.7530 7.0678 8.0559 7.3899 8.3644 30 $4.2160 4.4904 4.7742 5.0669 5.3682 5.6779 5.9955 6.3207 6.6530 6.9921 7.3376 6.0 6.5 7.0 7.5 8.0 Note: To use this table to figure a monthly mortgage payment, divide the amount borrowed by000 and multiply by the appropriate figure in the table for the interest rate and time period of the loan. For example, a $150.000 oan for 30 years at 60 percent would require a payment of $959,280 [(5160,000 - 100059955 2 0 vears would require payment of $1,146.29 TI$ 160,000 1000) X 7.1643). For calculations for different intensit a te a man companion website