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Chapter 5 Financial Planning Exercise 3 Rent vs. buy home

Use Worksheet 5.2. Kayla Thompson is married and currently rents an apartment for $725 per month and paying $375 annually for renter's insurance. Her landlord required a $1,000 security deposit on the apartment. She just found a small townhouse she can buy for $285,000. She has enough cash for a $10,000 down payment and $4,400 in closing costs. Her bank is offering 30-year mortgages at a 6 percent annual rate. Kayla estimated the following costs as a percentage of the home's price: property taxes, 2.5 percent; homeowner's insurance, 0.5 percent; and maintenance, 0.7 percent. She is in the 25 percent tax bracket, has an after-tax rate of return on invested funds of 4 percent, and expects the townhouse to appreciate 3 percent per year. Using Worksheet 5.2, calculate the cost of each alternative and recommend the least costly option - rent or buy - for Kayla. Assume that Kayla uses the standard deduction of $24,000. Round the answers to the nearest dollar.

Cost of renting: $

Cost of buying: $

Kayla should -Select-buy/rent the home.