RENT VERSUS BUY HOME.USE WORK SHEET 5.2. Amelia Flores is currently renting an apartment for $725 per month and paying $275 annually for renters insurance. She just found a small townhouse she can buy for $185,000. She has enough cash for a $10,000 down payment and $4,000 in closing costs. Amelia estimated the following costs as a percentage of the homes price: property taxes, 2.5 percent; homeowners insurance, 0.5 percent; and maintenance,0.7 percent. She is in the 25 percent tax bracket. Using Worksheet 5.2, calculate the cost of each alternative and recommend the least costly optionrent or buyfor Amelia.

RENT-OR-BUY ANALYSIS A. COST OF RENTING 1. Annual rental costs [ 12 monthly rental rate of 2. Renter's Insurance 3. Opportunity cost of security deposit: after-tax savings rate Total cost of renting (line A.1+ line A.2 + line A.3) B. COST OF BUYING 1. Annual mortgage payments (Terms: T 12 x monthly mortgage payment of 2. Property taxes % of price of home) 3. Hameowrer's insurance { %Of price af home) ( % of price of home -_ S. After-tax cost of interest on down payment and closing costs % after-tax rate of return 6. Total costs (sum of lines B.1 through 8.5) Less: 7. Principal reduction in loan ba lance (see note below 8. Tax savings due to interest deductions (Interest portion of mortgage payments x tax rate of 9. Tax savings due to property tax deductions (line B.2 x tax rate of 10. Total deductions (sum of lines 87 through B .9 11. Annual after-tax cost of home ownership (line B.6-line B.10) 12. Estimated annual appreciation in value of hane % of price of home) Total cost af buying (line B.11- line B.12 Note: Find monthly mortgage payments from the Exhibit in chapter 5 of your textbook. An easy way to approximate the portion of the annual loan payment that goes to interest (line B.B) is to multiply the interest rate by the size of the loan To find the principal reduction in the loan balance (line 8.7), simply subtract the amount that goes to interest from total annual morteape payments Tax-shelter items