Final answer:
To decide if David and his wife should rent or buy, we analyzed the annual costs of both options. We factored in the costs of the mortgage, taxes, insurance, maintenance, and opportunity costs against rental payments, renter's insurance, and the opportunity cost of the security deposit. Considering potential tax savings and home value appreciation is key to a complete analysis.
Step-by-step explanation:
Rent vs Buy Analysis
When deciding whether to rent or buy a home, it is essential to consider both financial and personal factors. Let's analyze the provided data to determine the best option for David and his wife. First, we consider the cost of renting:
- Annual rental cost: $1,100 x 12 = $13,200
- Security deposit: $1,100 x 2 = $2,200 (This has an opportunity cost since this money could have been invested.)
- Renter's insurance: $200 every six months = $400 a year
- Opportunity cost on security deposit: $2,200 at 2% per annum = $44
- Total Annual Cost of Renting: $13,200 + $400 + $44 = $13,644
Now, let's look at the costs if they decide to purchase:
- Monthly mortgage payment: $1,185 x 12 = $14,220
- Property taxes: $247,000 x 2% = $4,940
- Homeowner's insurance: $247,000 x 0.5% = $1,235
- Maintenance expenses: $247,000 x 2% = $4,940
- Down payment: $247,000 x 20% = $49,400
- Closing costs: $3,500
- Opportunity cost of down payment and closing costs: ($49,400 + $3,500) x 2% = $1,058
- Total costs (before tax deductions and appreciation): $14,220 + $4,940 + $1,235 + $4,940 + $1,058 = $26,393
However, purchasing may also provide tax savings and the benefit of home appreciation:
- Reduction of loan principal is part of the monthly mortgage payment.
- Tax savings on mortgage interest and property tax deductions can significantly reduce the effective cost of homeownership.
- Estimated annual appreciation in home value: $247,000 x 3% = $7,410