Mila is moving to a new location for work.Based on her revised employment contract, she will be
Question:
Mila is moving to a new location for work. Based on her revised employment contract, she will be working at the new location for the next 5 years. She is deciding whether she should rent or buy a house. From her research, she can rent an apartment for a cost of $1,800 per month. The house she is considering purchasing will cost $625,000. Mila has just signed a contract to sell her current home and would use some the proceeds from this sale for the down payment. The amount for a down payment for her next property would be $125,000. Mila prefers to purchase a home as she enjoys gardening. She also has many ideas of how to decorate her new space.
Her financial institution is currently offering a mortgage rate of 4.25% for 5 years. Mila would amortize the mortgage over a period of 25 years with monthly payments.
Other costs associated with owning the home are as follows:
· $5,100 p.a. for property taxes.
· $100 monthly for insurance.
· New roof in 3 years, estimated cost in 3 years is $23,000.
· $525 per month for utilities (electricity, water, heat) and landscaping costs (Mila would hire a company to cut grass in the summer and do snow removal in the winter).
All expenses are expected to increase at a rate of 2% p.a. Due to the demand for homes in the new location, the home value is expected to increase 3.25% p.a. Mila can earn a return of 4.5% p.a.
Required:
a) Is it a good time for Mila to buy a home or rent in the new location? Ignore expenses such as moving and legal and ignore taxes.
b) What are 3 other factors Mila should consider in her rent vs buy decision?
Financial Accounting Tools for business decision making
ISBN: 978-0470534779
6th Edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso