Reference no: EM132171293

Question: A couple in Ruston, Louisiana, must decide whether it is more economical to buy a home or to continue to rent during an inflationary period. The couple rents a one-bedroom duplex for $450 a month plus $139 a month in basic utilities (heating and cooling). These costs have a projected inflation rate of 5%, so the couple's monthly costs per year over a 10-year planning horizon are The couple would like to buy a home that costs $75,000. A local mortgage company will provide a loan that requires a down payment of 5% plus estimated closing costs of 1% cash. The couple prefers a 30-year fixed-rate mortgage with an 8% interest rate. The couple falls in the 30% marginal income tax rate (federal plus state), and as such, buying a home will provide them some tax write-off. It is estimated that the basic utilities for the home inflating at 5% will cost $160 per month; insurance and maintenance also inflating at 5% will cost $50 per month. The home will appreciate in value about 6% per year. Assuming a nominal interest rate of 15.5%, which alternative should the couple select? Use a present worth analysis. (Note: Realtor's sales commission here is 5%.)