Question

A family currently lives in an apartment whose monthly rent is $950. They’re thinking of buying a house which would cost $220,000. They plan to live in this house for 5 yrs & sell it at the end of the 5th yr. They would put a down-pmt of $20,000 & finance the balance through a mortgage at 3.5% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal & interest) at the end of each yr for the next 5 yrs. The house will have the following additional expenses: annual maintenance: $1,500; property taxes: $5,500; insurance: $1,200. Assume they are in the tax bracket of 20% & the price of the home, rent & expenditure increases by 2.5%/yr. Their opportunity cost/RR is 5%/yr. Note that property taxes are tax deductible & there are no tax payable on capital gains. Use annual compounding for the amortization schedule of the mortgage. Should they buy this house or continue to rent?

Answer 1

Monthly Rent paid by the family= $950

Annual Rent= $950*12 = $11400.00

Cost bear by the family, if go for buying House:

Cost of House= $220,000.00

Down Payment= $20,000.00

interest Rate= 3.5%p.a for 5 years

Additional Expenses:

Maintenance= $1500

Property Tax= $5500

Insurance= $1200

Partcular	Year 1	Year 2	Year 3	Year 4	Year 5
Cost of House	$220,000	225500	231137.5	236915.9375	242838.8359
Down Payment	$20,000.00	$20,000.00	$20,000.00	$20,000.00	$20,000.00
Interest Rate	3.50%
Amount of Installment paid p.a	$23,832.00
Additional Expenses:	Year 1	Year 2	Year 3	Year 4	Year 5
Maintenance	$1,500	1537.5	1575.9375	1615.335938	1655.719336
Property Tax	$5,500	5637.5	5778.4375	5922.898438	6070.970898
Insurance	$1,200	1230	1260.75	1292.26875	1324.575469
Total add. Exp	$8,200	8405	8615.125	8830.503125	9051.265703
Total Cash required for Year 2	$32,032.00	32832.8	33653.62	34494.9605	35357.33451
Particular	P.m	P.a	Year 1	Year 2	Year 3	Year 4	Year 5
Rent	$950	$11,400	11685	11977.125	12276.55313	12583.47	12898.05
Growth rate		2.50%

Increase in the price of the House after 5 years	$22,839
Rent to be paid in 5 years	61420.1987
Add. exp to be paid in 5 years	$43,102

Hence as per the above calculation, after considering the 2.50% p. a growth rate.

There is capital gain of $22839.00 (5 years), but with an increase in the huge expenditure in terms of add. exp which would be = $43102 (total of 5 yrs)

Whereas total rent for 5 years won't go above $61420.20

Going to buying a house would be needing a huge investment for which family needs to plan for it after considering the savings and another source of income as well, which entirely depends upon the potential of the family for bearing those expenses and cost as per their source of income which is not yet disclosed here.

On the other side, there is not much capital gain also, hence suggestion would be not the go for buying the house and opt for Rent property might be a better and more relaxing option for them.