To determine whether buying or renting is a better financial decision, we need to compare the total cost of renting and buying after accounting for the associated benefits and costs.

Step 1: Calculate the Total Rental Cost

Rental costs include:

• Annual Rent: $8,180
• Insurance: $225
• Security Deposit: $1,050 (but we assume this is refundable at the end of the rental term, so we exclude it from ongoing costs)

Thus, the total annual rental cost is: $\text{Total Rental Cost} = \text{Annual Rent} + \text{Insurance}$ $\text{Total Rental Cost} = 8,180 + 225 = 8,405$

Step 2: Calculate the Total Buying Cost

Buying costs include:

• Annual Mortgage Payments: $10,500 (includes $9,975 interest and $525 growth in equity)
• Property Taxes: $2,100
• Down Payment and Closing Costs: $5,200 (but this is a one-time cost and not an annual expense, so we won’t include it in the annual cost)
• Insurance and Maintenance: $1,850

The buying costs also include some financial benefits:

• Tax Deduction on Interest: Since the interest on the mortgage is tax-deductible, we calculate the tax savings on the interest portion: $\text{Tax Savings on Interest} = 9,975 \times 28\% = 2,793$
• Growth in Equity: This is an implicit benefit from paying down the mortgage, which is $525 annually.
• Appreciation: The house is estimated to appreciate by $2,500 annually.

Total Buying Cost Calculation:

The total cost of buying would be the sum of mortgage payments, property taxes, insurance and maintenance, minus the tax savings on the interest, growth in equity, and appreciation. The formula is: $\text{Total Buying Cost} = (\text{Mortgage Payments} + \text{Property Taxes} + \text{Insurance and Maintenance}) - (\text{Tax Savings on Interest} + \text{Growth in Equity} + \text{Appreciation})$

Substituting values: $\text{Total Buying Cost} = (10,500 + 2,100 + 1,850) - (2,793 + 525 + 2,500)$ $\text{Total Buying Cost} = 14,450 - 5,818 = 8,632$

Step 3: Comparison of Renting vs. Buying

• Total Rental Cost: $8,405
• Total Buying Cost: $8,632

Recommendation:

Since the total rental cost ($8,405) is slightly lower than the total buying cost ($8,632), renting appears to be the slightly more affordable option, although the difference is relatively small. Additional factors like future appreciation of the property, personal financial goals, and how long the individual plans to stay in the home should also be considered before making a final decision.

Do you have any questions or need further details?

Here are 5 related questions:

1. How does the length of time staying in the home impact the buying decision?
2. What role does the appreciation rate play in the overall recommendation?
3. How does a higher or lower interest rate on savings affect the analysis?
4. What would happen if the down payment were higher or lower?
5. How does the tax deduction for mortgage interest influence the decision?

Tip: Always consider the long-term benefits like home equity and potential appreciation when deciding between renting and buying, especially if planning to stay for an extended period.