In: Finance

- Patricia has been renting a two bedroom house for years. She pays $1000 per month in rent for the apartment and $400 per year in property and liability insurance. The owner of the house wants to sell it, and Patricia is considering making an offer. The owner wants $180,000 for the property, but Patricia thinks she could get the house for $170,000 and use her $20,000 in 3% CDs that are ready to mature for the down payment. Patricia has talked to her bank and could get a 4.5% mortgage loan for 30 years to finance the remainder of the purchase price. Property taxes on the house are $2000 per year. Insurance would need to be upgraded to $900 a year and Patricia would incur about $1000 in costs the first year for maintenance. Property values are increasing at about 2% per year in the neighborhood. Patricia is in the 25% marginal tax bracket.
- calculate the monthly mortgage payment for the mortgage loan.
- whether Patricia should continue renting or would she be better off buying the home. For any numbers not included in the scenario but are on the worksheet just leave blank.

**Calculation of
monthly mortgage payment for ML**

Purchase price of house ( as per Patricia's cal.)= USD 170,000.

CDs 3% (since maturity period is not given, considered the maturity value) = USD 20,000

**Considering the Bank will provide USD 150,000 with 4.5%
for 30 years. ( zero bank charges for processing)**

As per the calculation EMI will be : USD 760.00

Total payment: USD 273,610.00 (360 installments)

Total Interest Payable= USD 123,610.00 (Fed tax exemption can be availed)

Other Charges during first year = Property tax+ Insurance +Maintenance exp= (2000+900+1000) = USD 3,900

Second Year onwards = USD 2900

Total Rental Charges for next 30 years (Insurance excluded)=
12000* 30 years with 5% increase =**USD
830,514.00**

Total Mortgage payment = 273,610

**Whether Patricia should continue renting or would she be
better off buying the home?**

**It is better to buy the house apart from the rental cost
benefit** (see above calc), she may able to avail property
appreciation and Fed tax benefit.

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