Rent vs. Buy. Alex has been renting a house for several years. He pays $800 per month in rent and $350 per year in renters insurance. The owner of the house wants to sell the house for $125,000, and Alex is considering buying it. Alex has $25,000 in 3 percent certificates of deposit that are ready to mature for the down payment. He has talked to his banker and could get a 4.5 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 $2,200 during the first year of the loan. Property taxes on the house are $1,800 per year. Property and liability insurance is $920 per year. House maintenance would cost about $1,580 per year. Property values are increasing at about 2.5 percent per year in the neighborhood. Alex is in the 25 percent marginal tax bracket. Answer question a), b), and c).

a) Calculate the monthly mortgage payment for the mortgage loan that Alex would need. (Use Table 9-4 on Page 285 of the textbook).

b) How much interest would Alex pay during the first year of the loan?

c) Use the following worksheet to determine whether Alex would be better off buying or renting. Your Figures Costs Rent Buy Cash-flow considerations Annual rent or mortgage payments Property and liability insurance Private mortgage insurance Real estate taxes Maintenance Other housing fees Less interest earned on funds not used for down payment Cash-flow cost for the year Tax and appreciation considerations (using a 25 percent marginal tax rate) Less principal repaid on the mortgage loan Plus tax on interest earned on funds not used for down payment Less tax savings due to deductibility of mortgage interest Less tax savings due to deductibility of real estate property taxes Less appreciation on the dwelling Net cost for the year