Kim and Dan Bergholt are government workers. They are considering purchasing a home in the Washington, D.C., area for about $280,000. They estimate monthly expenses for utilities at $220, maintenance at $100 and home insurance payments at $50. Their only debt consists of car loans requiring a monthly payment of $350.

Kim 's gross income is $55,000 per year and Dan's is $38,000 per year. Their marginal tax rate is 30%. They have saved about $60,000 in a mutual fund on which they earned $3,000 last year. They plan to use most of this for a 20 percent down payment and closing costs. A lender is offering 30-year variable rate loans with an initial interest rate of 8 percent given a 20 percent down payment and total closing costs equal to 2% of purchased amount.

Before making a purchase offer and applying for this loan, they would like to have some idea whether they could afford it.

Given this further information, estimate whether it is financially more attractive for the Bergholts to rent or to purchase the home over a .five-year holding period. (Assuming the contract interest rate of 8%, monthly interest payments over five-year period would total $87,574. Hint: Mortgage interest is tax deductible. Hence, they have a tax savings of 30% of the interest paid if they purchase the home. There will be a selling expenses of [1%] of sales commission when they sell their home.)

Buying Renting Gross gain or loss Buying Appreciation Increase in Home Equity Selling expenses (-) Initial closing costs (-) Opportunity Cost of Downpayment (-) Gross gain/Loss Renting Opportunity Cost of Security Deposit (-) Total Annual Expenses over 5 years Buying Mortgage Payment Tax saving on Interest (-) Repair and maintenance Insurance Total Expenses Renting Rent Insurance Total Expenses Total gain or loss Buying Renting Gross gain or loss Buying Appreciation Increase in Home Equity Selling expenses (-) Initial closing costs (-) Opportunity Cost of Downpayment (-) Gross gain/Loss Renting Opportunity Cost of Security Deposit (-) Total Annual Expenses over 5 years Buying Mortgage Payment Tax saving on Interest (-) Repair and maintenance Insurance Total Expenses Renting Rent Insurance Total Expenses Total gain or loss