The rent vs. buy decision is one most people contemplate several times over the course of their lifetimes. There are many calculators out on the web, and below is a link to one that is easy to use and appears to be accurate. Whether or not it takes into consideration the fact that at some point you will own the home and not need a mortgage, is unknown and will change the calculations should that happen. However for the purposes of this course and this exercise we will use the calculator and base our answers on the answers provided by the calculator. One other factor that should always be considered is equity build up through principal reduction. There are several ways to build equity in a home. You can pay down your loan, you can make improvements to the property, or your value may increase through appreciation.

Suppose you are renting a 3 bedroom 2 bath apartment for $1,250 per month. In today’s mail you received a notice that effective in 30 days your rent is going to increase to $1300 per month and you can be guaranteed that rate for up to 12 months if you sign a new lease agreement. If you decide to remain in your apartment on a month-to-month basis your rent will increase to $1,350 per month. You have lived in the apartment for the past two years and every 12 months the rent goes up by $50, which is about 4%. Initially you put up a security deposit equal to your first months rent. You also have been paying about $250 per year for the required renters insurance.

lately you have been considering buying a home and have found one that meets your needs for a home price of $175,000 located in a good neighborhood. It will require a minimum 10% down payment and a mortgage loan at 5.5% interest on a 30 year term. The tax rate for this home is assumed to be 1.5% input this into the mortgage calculator. You have saved enough to put 20% down which will illuminate the need for private mortgage insurance (PMI). The calculated payment fits within the amount of home your lender has pre-qualified you for. Since you are in the 20% marginal income tax bracket and itemize your expenses, you could benefit from the interest rate and property tax deduction. You are planning on staying in the home for eight years. Homes in this market have appreciated at the rate of 2.5% per year provided they are maintained. You know that if you continue to invest your savings in the same balanced mutual fund index that you have been using your investment rate Everything has been about 3.75%. Inflation has been around 1.5% the last few years, so it seem like there is equity group about the inflation rate in this area. It will be necessary to pay some closing cost if you purchase the home above. You calculate that those expenses will be about 3% and at the end of the 8 year holding period when you sell you will also pay selling costs of around 6.75%. From the day you purchase the home until the day you sell you will have expenses for maintenance/renovation of 1.25%. Additionally, you will have an ongoing expenses for homeowners insurance .50% and utilities $350 per month. There is a great homeowners association in this neighborhood that has HOA fees of $120 per month.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html
Follow The link above to the rent/buy calculator. Enter the information from the case outlined above into the calculator and compute the various elements of the rent/purchase example. Answer the following questions.

1. What is your proposed mortgage payment? Calculate with 10% down and 20% down.

2. Should you continue to rent of buy the home you have located?

3. Which option is the most cost-effective in this example 10% down payment or 20% down payment?

4. If you decide to live in the home for three years how does this affect the rent/buy decision?

5. If the mortgage rate was 8.5% and all other terms and conditions remain the same what is the monthly payment or rent amount?

6. If you obtain a 15-year mortgage at 4% how would this affect your rent/buy decision?

7. If the growth or appreciation rate was to decline rather than increase how would that affect the rent/buy calculation?

8. How would the inflation rate affect the rent buy/calculation if it increased could you afford to pay more for a home? What if it declined?

9. If the investment rate increases what happens to the amount of payment you can allocate to rent or purchase?

10. In your own words what other factors would you consider in making a decision whether to rent or buy?

Answer rating: 100% (QA)

1 What is your proposed mortgage payment Calculate with 10 down and 20 down Answer in these answers ... View the full answer