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Alex Guadet of Nashville, Tennessee, has been renting a two-bedroom house for several years. He pays $900 per month in rent for the home and $300 per year in property and liability insurance. The owner of the house wants to sell it, and Alex is considering making an offer. The owner wants $160,000 for the property, but Alex thinks he could get the house for $150,000 and use his $25,000 in 3 percent certificates of deposit 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 $1,700 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 $3,000 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.

Use the Run the Numbers worksheet, Should You Buy or Rent? on page 264 of your textbook to determine whether Alex would be better off buying or renting. Recreate a similar table and fill out the information using the values given in the problem above.

Example Amounts Rent Buy Your Figures Rent Buy $12,000 $10,360 360 725 N/A N/A 0 0 0 3,000 600 1,800 N/A 0 720 N/A Annual Cash-Flow Considerations Annual rent ($1,000/month) or mortgage payments ($863.35/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 principalt 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 $11,640 $16,485 NA N/A 180 1,768 N/A N/A N/A 2,148 NA N/A 750 N/A | | | | N/A N/A $11,820 1,800 $10,019 Example Amounts Rent Buy Your Figures Rent Buy $12,000 $10,360 360 725 N/A N/A 0 0 0 3,000 600 1,800 N/A 0 720 N/A Annual Cash-Flow Considerations Annual rent ($1,000/month) or mortgage payments ($863.35/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 principalt 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 $11,640 $16,485 NA N/A 180 1,768 N/A N/A N/A 2,148 NA N/A 750 N/A | | | | N/A N/A $11,820 1,800 $10,019