Question

Sally will be enrolling in a PhD program that is expected to last for five years. With regard to her housing, she is provided with the following two options.

Option #1 Rent a one-bedroom apartment for five years at $1,000 per month.

Option #2 Buy a one-bedroom apartment valued at $500,000. Sally can make a down payment of $100,000, and she will pay $5,000 per month to cover both the mortgage and other homeowner expenses. Note that 10% of these $5,000 monthly payments represent interest payments on the mortgage. Sally intends to sell the apartment once her PhD is over in five years, when the value of the apartment is expected to be $600,000. Sally will be making the monthly payments of $5,000 for the whole time that she owns the apartment.

Assuming that both apartments are located in equally good neighborhoods and equally good buildings,

***which of these two options is better for Sally?

***Explain why.

Answer 1

Sally select the first option the amount she has to spend only $60000 ($1000*60 months). At the same time she select the second option only her interest is ever present for five years is $30000($500*60months). That means the principal amount of mortigage=$400000, monthly EMI=$4500($5000-10% interest).So the year of repayment=$400000/4500 that means 88.9 months (7.41 years).she owned this apartment only five years. Her payment of EMI total was $300000($5000*60 months) and also paid the downpayment was $100000.So total amount spent after five years for apartment was $400000. Apartment is finaly sold by Sally $600000. There for profit of her sale is $200000.

So the second option is better for Sally