Rental Costs Buying Costs Annual rent $ 7,380 Annual mortgage payments $ 9,800 ($9,575 is interest) Insurance $ 145 Property taxes $ 1,780 Security deposit $ 650 Down payment/closing costs $ 4,500 Growth in equity $ 225 Insurance/maintenance $ 1,050 Estimated annual appreciation $ 1,700 Assume an after-tax savings interest rate of 6 percent and a tax rate of 28 percent. Assume this individual has other tax deductions that exceed the standard deduction amount

a. Calculate total rental cost and total buying cost. (Do not round intermediate calculations. Round your answers to the nearest whole dollar.) Rental cost $ Buying cost $

b. Would you recommend buying or renting?

Renting

Buying

(a) $498, (b) if cost is the only standard, then you should rent because the cost of buying is higher than the cost of renting.

Explanation:

From the question given, let solve the problem for both (a) and (b)

(A). Total rental and total buying cost

Rental Costs Buying cost annual rent = $7,380

Annual mortgage payments = $9,800

The Mortgage payments 145 Insurance 2,830

Insurance, maintenance, taxes = 39

The Interest lost on security deposit = 270

closing costs for Interest lost on down payment = - 225

The Growth in equity = - 1,700

The Annual appreciation - 2,681

Tax savings for mortgage interest = - 498

Then,

Tax savings for property taxes is:

$ 7,564 Total rental costs = $ 7,564

$ 7,796 Total buying costs = $ 7,796

The Interest lost on security deposit = $650 * 0.06 = $39

The Interest lost on down payment and closing cost = $4,500 * 0.06 = $270

The Tax savings for mortgage interest = $9,575 * 0.28 = $2,681

Property taxes from tax savings = $1,780 * 0.28 = $498

Let solve for b,

(B) If the cost is the only standard, then you should rent because the cost of buying is higher than the cost of renting.