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Mr. and Mrs. Maxer are considering purchasing a $600,000 two-bedroom condominium and living in it for 5 years. They have saved $200,000, which can be

Mr. and Mrs. Maxer are considering purchasing a $600,000 two-bedroom condominium and living in it for 5 years. They have saved $200,000, which can be used for down payment and for closing costs. They will take out a mortgage loan to be amortized over 15 years. Interest rate on mortgage loan will be 3% per annum for the first 2 years and after that it will be 5% per year. Interest rate is compounded semi-annually. Apart from monthly mortgage payments other homeownership costs are estimated as follows:

Closing costs (legal, moving, land transfer tax, etc.) $20,000

Property Taxes $6,000/year

Insurance Premium $700/year

Condominium maintenance fee $8,000/year

Alternatively, they can rent the condominium for $1,900/month. Monthly rent of $1,900 includes property taxes. They can invest their savings to earn an after tax rate of return of 4% p.a. It is expected that rent, property taxes, insurance premium, and condominium maintenance fees, will increase at 2% p.a. Real estate prices will continue to rise in the foreseeable future at an average rate of 2% or 5% per year. Probability that price will rise at 5% per year is 3 times as much as the probability that price will rise at 2% per year.

Should they buy or rent?

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