QUESTION 4: 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 semiannually. 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? QUESTION 4: 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 semiannually. 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