Question

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A family currently live in an apartment whose monthly rent is $1050. They are thinking of buying a house would cost $250,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a down payment of $25,000 and finance the balance through a mortgage at 3% interest rate. The mortgage is to be repaid in 5 annual installments (which include both principal and interest) at the end of each year for the next 5 years. The house will have the following additional expenses: annual maintenance: $1,500; property taxes: $5,500; insurance: $1200. Assume they are in tax bracket of 20% and the price of home, rent,2 and expenditure increases by 2% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.

Calculate the Post tax Mortgage Cost (Principal repayment plus after tax interest cost) for year 1

a) $47,780

b) $48,034

c) $48,296

d $42,925

Calculate the total cost of owning in year 3.

Calculate the rent saved during year 2

Answer 1

- The loan amount is repayable together od with the interest at the rate of 3% loan amount and is repayable in equal installments. the end of each year gooit 12000 tab 20 - The PVAL at the rate of 3% for s years is 4.5797 at. Annual pat payment. os $ 2,25,000 4.5792 OT $ 49,130 = Interest amount post tex - $ 225,000 capcox 37 $ 6,750 Tax on Interests 6750x 207. $ 1,350 $ 6750 - $ 1350 BSCRIBIRTE $ 5400 3 post tax Mortgage Cast $ 49,130 $ 13,50 ( TCX ON IS 2 Erst 2 EPS1 2NSE B 47,780. int) Answer a $ 47,780

Total cost of owning in year-3... Calculation of Interst and principal sd amount End of year Total PaymcЛАХ $). Interest Principal principal (6) Amount of 1 N $ 49,130 $ 49,330 $ 49,130 $ 49,130 $ 49,130 3 4 $ 6750 $ 42,380 $ 182,620 8 5479 $ 43,651 $ 13899 CE $4169 $94008 $ 2820 $ 46, 330 $ 47698 $ 1432 $ 47698 0 15 44961 5 Colla Balancing amount. y Calculation of Expenses years 2 13 4 5 Maintenance Annual 9 TSOO $ 1530 $ 1561 $ 1592 $4624 O ONT $ 5610 $ 5722$ 5837 $ 5953 $ 5500 TEN $ 1224 S 1248 $ 1273 $ 1299 Property Insurance $ 1200