Mr. and Mrs. Peterson have out grown their 1,000 sq. ft. apartment they rented when they got married. While they are seriously considering the purchase of their first home, they are not opposed to moving into a larger rental property. The Petersons have a combined annual gross income of $150,000. Like many college graduates they are making student loan payments. Their combined student loan plus a car loan payment will be $800 a month for the next seven years. After that they will just be making student loan payments of $500 for an additional 23 years. Their credit score is 730. The Petersons have saved $120,000 to use for a down payment. In the geographic area in which they would like to live, the average annual property tax and home owner's insurance expenses run two percent of the value of the house. Housing Options After spending many weekends going to open houses and spending countless hours on Trulia / Zillow, the Petersons have narrowed their house choices down to the following two homes. Both homes are in the same school district and the same city with the same property tax rate (2% of the house value). Other things remain the same. Buy House A: It is a lovely 3,500 sq. ft. single family home on 0.85 acres. It is recessed and private with lush landscaping. It has 4 bedrooms and 3 full and one-half bathrooms. This house was built in 2005. The current owners have undertaken extensive renovations. There is a new wood deck and two new patios. It is in the exclusive neighborhood of historic North Shore. There is convenient access to shopping, dining, and other amenities. There are too many upgrades to count. This house looks brand new. The asking price is $550,000 and the house has been on the market for 63 days. Buy House B: It is a completely updated 2,800 sq. ft. single family home. A 2005 total rehab transformed this home that was built in 1980. It has 3 bedrooms and 3 bathrooms. It sits on a .34-acre lot with easy access to the expressway close to historic North Shore. It is in a great location in a walking community. The asking price is $400,000. It has only been on the market for one week. Rent Condo

A. A third option for the Petersons is to rent a condo now and to put off purchasing a home until they have a family. There is a 2500 sq. ft. condo for rent on the top floor of a new high rise. This option has 3 bedrooms and 2 bathrooms. It comes with two parking spaces in an enclosed garage. It has additional storage space in a secured area in the basement. The condo has concierge service and the elevators require a key fob to keep non-residents from wandering around the building. There is a fitness center and an outdoor pool that is located on the roof of the 20th floor. This condo rents for $2200 a month including a $200 monthly residents' association fee to cover the cost of the concierge, pool and gym maintenance, and the cleaning of the communal areas. If the Petersons purchase one of the two houses, they plan to use the entire $120,000 for a down payment. If they end up renting, they will invest this amount of money is some index funds that are expected to earn no less than 6% annually. A possible cost of delaying the purchase of a home is that housing prices have been increasing at about 3% annually. Even if the Petersons end up renting a large condo, they know that when they have children, they will have to purchase a house. It is just a question of whether they should do that now or at some time in the future. The Petersons have turned to you for advice. They would like you to do a financial analysis of the three options presented above. They have asked you to complete the Excel spreadsheets below. After the Petersons obtain your feedback, they will have to decide which house to purchase or to rent the large condo. If the Petersons decide on the condo option, how much will their current $120,000 savings grow to in five years if they earn the expected annual rate? How much would a house like the two-housing options cost in five years? If the Petersons are in the 30% marginal tax bracket, how would this fact alter your projections? Remaining in their current apartment is not an option. In addition to the financial analysis, what other variables do you think the Petersons should consider?