Question

Problem 9-1 Comparing Renting and Buying [LO9-2] Rental Costs Buying Costs Annual rent $ 7,380 Annual mortgage payments $ 9,800 ($9,575 is interest) Insurance 145 Property taxes 1,780 Security deposit 650 Insurance/maintenance 1,050 Down payment/closing costs 4,500 Growth in equity 225 Estimated annual appreciation 1,700 Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. (a) Calculate the total rental cost and total buying cost. (Round your intermediate calculations and final answers to the nearest whole number.) (b) Based on the cost criteria, would you recommend buying or renting

Answer 1

Computation of Rental Costs

Particulars Amount

Rent $7,380

Insurance $145

Loss of Interest on Security Deposit $39 ($650*6%)

Total Rental Costs $7,564

Computation of Buying Costs

Particulars Amount

Annual Mortgage Payments $9,800

Taxes, Insurance and Maintenance $2,830 ($1,050+$1,780)

Loss of Interest on Down Payment $270 (4,500*6%)

Growth in Equity -$225

Annual Appreciation -$1,700

Mortgage Interest Tax Savings -$2,681 (9,575*28%)

Tax Savings from Property Taxes -$498 (1,780*28%)

Total Buying Costs $7,796

b. Based on the cost criteria, i would recommend renting as it results in lesser cost