There are several factors to consider when deciding whether to rent or buy a home. In our case study, Beth and Jon Linton are considering the critical decision of buying or renting at Stedman Place in Newton, which is a western suburb of Boston, Massachusetts. The timing of this decision is important, as the decision is being made in July of 2006, before the housing market downturn. The case gives insight into the couple’s decision-making process, and the pros and cons of buying versus renting are weighed.
There are a few important benefits associated with buying a home that Beth and Jon will want to consider. First, as Beth’s father has mentioned, building equity in a home can be preferable to renting, where there is no chance of
* No consideration of state income tax. * No change on the assessed value of the house. * No change on the tax bracket for the couple. * The growth rate of the house is 4% at the year 5 when couple decide to sell the house. * Risk free rate is 0.0499

FIG 2 Decision to Buy house: | Cost | | | First year | Second year | Third Year | Forth Year | Fifth Year | FV | Down payment | -120,000.00 | | | | | -153,080.87 | Mortgage | -28,800.00 | -28,800.00 | -28,800.00 | -28,800.00 | -28,800.00 | -159,106.39 | Closing Costs | -4,500.00 | | | | | -5,740.53 | Property Taxes | -5,597.00 | -5,597.00 | -5,597.00 | -5,597.00 | -5,597.00 | -30,920.78 | Maintenance | -6,000.00 | -6,153.60 | -6,311.13 | -6,472.70 | -6,638.40 | -34,802.57 | Home Insurance | -1,200.00 | -1,260.00 | -1,323.00 | -1,389.15 | -1,458.61 | -7,291.65 | Bond | 984.90 | 984.90 | 984.90 | 984.90 | 984.90 | 5,441.11 | Tax savings | 11,351.01 | 11,351.01 | 11,351.01 | 11,351.01 | 11,351.01 | 62,708.97 | Sale of house | | | | | | 729,991.74 | pay off mortgage | | | | | | -480,000.00 | Brokerage commission | | | | | | -36,499.59 | | | | | | total: | -109,300.56 | Decision to Rent house | | | | | | | rent for 5 years | -43,200.00 | -44,305.92 | -45,440.15 | -46,603.42 | -47,796.47 | -250,578.48 | bond | 4,924.50 | 4,924.50 | 4,924.50 | 4,924.50 | 4,924.50 | 27,205.54 | |