RENT-OR-BUY ANALYSIS

A. COST OF RENTING

1. Annual rental costs

( 12 × monthly rental rate of $ 1,200.00 )

2. Renter’s insurance

3. Opportunity cost of security deposit: $ 1,200.00 × after-tax savings rate 4.000

Total cost of renting (line A.1 + line A.2 + line A.3)

B. COST OF BUYING

1. Annual mortgage payments (Terms: $ 40,000.00 , 180 months, 6 %)

( 12 × monthly mortgage payment of $ 337.54 )

2. Property taxes
( 0.7 % of price of home)

3. Homeowner’s insurance
( 0.0 % of price of home)

4. Maintenance
( 5.0 % of price of home)

5. After-tax cost of interest on down payment and closing costs

( $ $ 40,000.00 × 4.0 % after-tax rate of return)

6. Total costs (sum of lines B.1 through B.5)

Less:

7. Principal reduction in loan balance (see note below)

8. Tax savings due to interest deductions*

(Interest portion of mortgage payments $ 2,400.00 × tax rate of 25 %)

9. Tax savings due to property tax deductions*

(line B.2 × tax rate of 25

10. Total deductions (sum of lines B.7 through B.9)

 11. Annual after-tax cost of home ownership
(line B.6 - line B.10)

12. Estimated annual appreciation in value of home

( 4 % of price of home)

Total cost of buying (line B.11 - line B.12)

Note: Find monthly mortgage payments from the Exhibit in chapter 5 of your textbook. An easy way to approximate the portion of the
annual loan payment that goes to interest (line B.8) is to multiply the interest rate by the size of the loan.
To find the principal reduction in the loan balance (line B.7), simply subtract the amount that goes to
interest from total annual mortgage payments.
*Tax-shelter items.
 $ 14,400.00

550.00

4,800.00

$ 19,750.00

$ 4,050.51

1,200.00

600.00

8,750.00

1,600.00

$ 16,200.51

$ 1,650.51

600.00

300.00

2,550.51
 $ 13,650.00

$ 6,125.00

$ 7,525.00

ortion of the