Question

Continuing Case 22. Renting or Buying Housing Five years have passed and Jamie Lee, 34, is considering taking the plunge-not only is she engaged to be married, but she is also deciding on whether to purchase a new home. Jamie Lee's cupcake café is a success! It has been open for over a year now and has earned itself rave reviews in the local press and from its regular customers who just cannot get enough of her delicious varieties of cupcakes. One such customer, who stopped by on a whim in the café's first week of business, Is Ross. After a whirlwind courtship. Ross, a self-employed web designer, proposed, and Jamie Lee agreed to be his wife. The bungalow that Jamie Lee has been renting for the past five years is too small for the soon-to-be newlyweds, so Jamie Lee and Ross have found a brand new three-bedroom, 2 bath home in a quiet neighborhood for $273.000. Their neighborhood's homeowner's association dues would be $300.00 a year. After paying a year's worth of house payments, their equity would be $3,900. Based on Jamie Lee and Ross' income, they fall into a 25% tax rate bracket. Use this payment information along with the information below to compare the costs of renting and buying a house. $650 $300 $80 105 $125121 Rent payment for a house monthly Renter's security deposit Renter's insurance (yearly Savings account interest rate Mortgage payment (monthly National average property tax rate Homeowner's insurance payment monthly Maintenance and repair (% of home value) Interest lost on down payment closing costs Mortgage Interest paid in first year Estimated annual appreciation 119% $25 $750 $12,600 $2.500 Rental Costs Monthly rent Annual rental payments (monthly rentx 12) Renter's insurance Interests on security deposit depositatertax savings account interest rate)

Answer 1

Rental costs:

Particulars	Calculations	$
Annual rental payments	$650 x 12 months	7,800.00
Renter’s insurance		80.00
Interest lost on security deposit	$300 x 1.05% (1 - 0.25)	2.36
Annual cost of renting		7,882.36

Buying costs:

Particulars	Calculations	$
Annual mortgage payments	$1,251.21 x 12 months	15,014.52
Property tax (annual)	$2,73000 x 1.19%	3,248.70
Homeowner’s insurance	$25 x 12 months	300.00
Estimated repairs and maintenance	$273,000 x 1%	2,730.00
After tax interest lost on down payments		750.00
less: financial benefits of ownership
Growth in equity		(3,900.00)
Tax savings for mortgage interest	$12,600 x 25%	(3,150.00)
Tax savings on property tax	$3,248.7 x 25%	(812.18)
Estimated annual appreciation		(2,500.00)
Annual cost of buying		11,681.04

Notes:

Growth in equity should be taken as $3,900 minus previous year’s equity. The question didn’t mention their previous year’s equity. Hemce, the growth in equity is taken as $3,900.