Consider the life-changing decision of buying a first home. Search on an interne

ID: 1208166 • Letter: C

Question

Consider the life-changing decision of buying a first home. Search on an internet site for a home available for sale in your area (New Orleans). Given current mortgage interest rates, property tax estimates, the cost of upkeep, insurance, utilities, and other costs (at a minimum), do you believe buying this home is a wise financial decision? Now compare the cost of rent for an apartment of similar size in the same area. How does this compare with the cost of maintaining a home for one year? Create a short but detailed analysis of your findings that compares the total cost of the purchase of a home with the total cost to rent an apartment. Which decision is optimal? Are there any qualitative points to consider in addition to your calculation? Note to document references in APA format.

Explanation / Answer

Lets understand what the concept of buying and renting says first:

Pros & Cons of Renting:

Despite the fact that you can’t build equity, renting offers you the most freedom and flexibility, especially if you are on a month-to-month lease.

Advantages

Disadvantages

Pros & Cons of Buying a Home:

Advantages

Disadvantages

Important Questions to Consider:

1. How Long Do You Expect to Live There?

2. What Are the Costs of Buying?

3. What Are Your Future Plans?

4. Do You Have the Ability to Finance a Home Purchase?

Buying a home is a major decision that shouldn’t be taken lightly, but when faced with rising rent and low mortgage interest rates that make purchasing more affordable, you should take the time to consider the pros and cons of both renting and buying. Long-term homeowners, even those whose homes lost value during the recession, can build wealth that can be used to fund their retirement or pay for college. As long as you can comfortably afford your housing payments and are emotionally prepared to commit to homeownership, buying a home can be a smart financial move.

Now, lets condider a case:

now suppose the rent is 1500$ a month.

This comes out as to be 18000$ per year.

In this case we still have those 100000$. invested which also provide the returns on them.

Let's say we get about @2% return ie,. 2000$ is investment income.

so now we're at the cost of 18000-2000 = 12000$.

The total cost of buying the property is 400000$.

Now, out of the total amount 100000$ is for the downpayment and 300000$ is as interest only loan @ 6%.

for which it comes out to be as 18000$.

now you save some money as proportion of taxes on the above amount say as 1/3rd of it so it comes out to be 6000$.

so the effective interest that you pay after the tax is 18000-6000$ that is 12000$(effective cost of interest)

now there are other costs of home ownership so you will also have to pay property tax. so lets say its 1% property tax of 400000$ which comes out to be $4000$.

and you might also have to upkeep .the house with repairing and other such things which costs upto 2000$ per year.

so adding up all these costs ie,. 12000+4000+2000 = 18000$/year.

Now, considering the following analysis, the things ofcourse might change in the future,

But,

purely considering this year it seems like that individual is actually benefited by renting an apartment only.

And hence, the decesion for renting an apartment can be regarded as an optimal one.

Rent Buy