Case Study 3 - Is Owning a Home a Net Gain or Net Loss Over Time?

Future worth value if sold at 363,000:

 A: 30-year, fixed rate + investments = 243,246

 B: 15-year, fixed rate + investments = 246,010
 Rent-don’t buy: 109,199

PLAN B ANALYSIS

Amount of money required for closing costs:

Downpayment (10% of 330,000) 33,000

Up-front fees 3,000

Total 36,000

Total amount of loan is 297,000 and equivalent monthly principal and interest is determined by 5%/12 =
0.4167% per month for 15(12) = 180 months

A = 297,000(A/P,0.4167%, 180) = 2350

Add T&I which is 500, total is 2850

The future worth of plan B is the sum of remainder of the 40,000 available for the closing costs (F1b) left
over money from that available for monthly payment (F2b) and increase in the house value when it is
sold after 10 years (F3b).

F1b = 7278

F2b = 0

Loan balance = 297,000(F/P, 0.4167%, 120) – 2350(F/A, 0.4167%, 120)

= 297,000(1.6471) – 2350(155.2856)

= 124,268

F3b = 363,000 + 124,268 = 238,732

TOTAL FUTURE WORTH OF PLAN B IS:

Fb = F1b + F2b + F3b = 7278 + 0 + 238,732 = 246,010

 YEA INVESTED THIS INTEREST TOTAL
R YEAR INVESTED
0 40000 40000
1 2850 2400 45250
2 2850 2715 50815
3 2850 3048.9 56713.9
4 2850 3402.834 62966.734
5 2850 3778.00404 69594.73804
6 2850 4175.68428 76620.42232
2
7 2850 4597.22533 84067.64766
9
8 2850 5044.05886 91961.70652
9 2850 5517.70239 100329.4089
1
10 2850 6019.76453 109199.1734
5

Above is the RENT-DON’T BUY PLAN ANALYSIS

Summary of the future worth values if sold at 231,000:

A: 30-year, fixed rate + investments

231,000 – 243,386 = -12,386 (must pay purchases to buy)

Total future worth of plan A

7278 + 116,354 – 12,386 = 111,246

B: 15-year, fixed rate + investments

231,000 – 124,286 = 106,714

Total future worth of plan A

7278 + 0 + 106,714 = 113,992

Rent-don’t buy:

From the table above = 109,199

THEREFORE, PLAN B WHICH IS THE 15 YEAR LOAN HAS THA LOWEST, BUT THE ECONOMIS ADVANTAGE IS
MUCH LESS