Which Is Better: To Rent or To Bury? The decision of whether to rent or buy housing is a personat decicion that is based on both your lifertyle and your finances. While most finandal experts argue that the financial aspect of the decision is important, it is also important not to base your rent-or-buy decision solely 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 condorninium. After fooking for several months, they've narrowed their cholce down to one particular unit, and the builder is willing to lease or sell-depending upon the prefernnce of the buyer. To perform a rent-or-buy analysis, Aloko 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 s200 every six months, while a more comprehensive homeowners' policy will cost 0.5% of the horne's value per year. - Money used to fund the unit's security deposit could otherwise be invested to eam 2% per year after taxes, Funids expended for a home's down parment and closing costs also incur an opportunity cost. - If the unit is purchased, it will cost $85,000 and will requirt a 20% down payment. The foan will carry an interest rate of 6%, a term of 30 years, and monthly payments of 5408 . The closing costs associated with the unit's mortgage will be 53,500. - The property takes 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 youl be willing to itemize your tax deductions in the event that you purchase vour new home. - Finandal publications report that home values are expected to increase by 3% this vear due to inflation. Complete a rent-or-buy analysis worksheet to determine the total cost of renting and the total cost of purchasing Alko and her husband's prospective house and then recommend their best strategv. To complete the worksheet, enter the appropriate values in their corresponding blanks and round each alue to the nearest whole dollar, RENT-OR-BUY ANALYSIS FOR HOUSING COST OF RENIING Amount Security deposit Annual rental cost Renter's insurance Opportunity cost on security deposit Total Annual Cost of Renting: COST OF BUYING Monthly mortgage payment Annual mortgage payments Property taxes Homeowner's insurance Maintenance expenses Opportunity cost of down payment and closing costs Total costs 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 Based on this analysis, Akko and her husband should: Purchase the home, as the total cost of purchasing is less than the cost of renting 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