utomobile and Housing Decisions 10. Rent versus buy analysis - Part 2 Which Is Better: To Rent or To Huy? The decision of whether to rent or buy housing is a personal decision that is based on both your lifestyle and your finances. While most financial experts argue that the financial aspect of the decision is important, it is also important not to base your rent-or-buy decision solnly on the numbers. Your personal needs and housing market conditions are important However, it is still necessary to perform the financial analysis. Akiko and her husband are trying to decide whether to rent or to purchase a new condominium. After looking for several months, they've narrowed their choice down to one particular unit, and the builder is willing to lease or sell-depending upon the preference of the buyer, To perform a rent-or-buy analysis, Akiko and her husband have collected the following information: If they rent, the builder will require monthly rental payments of $1,000 and a security deposit equal to two months of rent . Since they want to be protected against the possible loss of their possessions, they will purchase a renters policy of $200 every ste months, while a more comprehensive homeowners policy will cost 0.5% of the home's value per year. Monway used to fund the unit's security deposit could otherwise be invested to earn 2% per year after taxes, Funds expended for a home's down payment and closing costs also incur an opportunity cost. . If the unit is purchased, it will cost $85,000 and will require a 20% down payment. The loan will carry an interest rate of 6%, a term or 30 years, and monthly payments of $408. The closing costs associated with the unit's mortgage will be $3,500 The property taxes and the maintenance and repair expenses on the unit are estimated to be 3% and 1% of the unit's total price, respectively Your ordinary Income is taxed at the rate of 28%, and you'll be willing to itemize your tax deductions in the event that you purchase your new home. Financial publications report that home values are expected to increase by 3% this year due to inflation Ch 05: Assignment - Making Automobile and Housing Decisions COST OF RENTING Security deposit $ Amount Annual rental cost Renter's insurance Opportunity cost on security deposit Total Annual Cost of Renting: 110 15,910 COST OF BUYING 839 10,068 7,000 Monthly mortgage payment Annual mortgage payments Property taxes Homeowner's insurance Maintenance expenses Opportunity cost of down payment and closing costs Total costs 875 1,750 1,925 21,618 Less Reduction of loan principal Tax savings on mortgage interest deduction Tax saving on property tax deduction Total deductions Annual after-tax cost of homeownership Estimated annual appreciation in home value Total Annual Cost of Purchasing: Based on this analysis, Akiko and her husband should: O Purchase the home, as the cost of purchasing is greater than the cost of renting Rent the home, as its total cost is less than the total cost of purchasing Purchase the home, as the total cost of purchasing is less than the cost of renting