Dianne’s Rent-or-Buy Decision Dianne Holland is a single woman in her late 20s. She is renting an apartment in the fashionable part of town for $1,200 a month. After much thought, she’s seriously considering buying a condominium for $175,000. She intends to put 20% down and expects that closing costs will amount to another $5,000; a commercial bank has agreed to lend her money at the fixed rate of 6% on a 15-year mortgage. Dianne would have to pay an annual condominium owner’s insurance premium of $600 and property taxes of $1,200 a year (she’s now paying renter’s insurance of $550 per year). In addition, she estimates that annual maintenance expenses will be about 0.5% of the price of the condo (which includes a $30 monthly fee to the property owners’ association). Dianne’s income puts her in the 25% tax bracket (she itemizes her deductions on her tax returns), and she earns an after-tax rate of return on her investments of around 4%.
Critical Thinking Questions
1. Given the information provided, use Worksheet 5.2 to evaluate and compare Dianne’s alternatives of remaining in the apartment or purchasing the condo.
2. Working with a friend who is a realtor, Dianne has learned that condos like the one she’s thinking of buying are appreciating in value at the rate of 3.5% a year and are expected to continue doing so. Would such information affect the rent-or-buy decision made in Question 1? Explain.
3. Discuss any other factors that should be considered when making a rent-or-buy decision. 4. Which alternative would you recommend for Dianne in light of your analysis?
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