Finance Chapter 5

Chapter 5 1. Vocabulary  The price of an asset being leased as specified in the lease agreement, which includes the negotiated cost of the vehicle and any applicable fees and taxes, is called the capitalized cost.  A closed-end, or walk-away, lease allows the lessee to merely return the vehicle at the end of the lease period, provided that the preset mileage limit has not been exceeded and the vehicle hasn’t been abused. A closed-end lease differs from an open-end, or financial, lease. In an open-end lease, the lessee may be responsible for an additional payment if the value of the car at the end of the lease period is less than the lease’s residual value. If, at the end of the lease’s term, the market value of the car is less than the residual value specified in the lease, then the lessee will be required to pay this difference.  Depreciation represents the loss in the value of an asset that occurs during the period of its ownership. It is calculated as the difference between the asset’s purchase price and its subsequent sale price.  A lease is a contract and business transaction in which the user of an item, such as a car or house, receives the right to use it in exchange for scheduled payments for a fixed period of time. Unlike a cash- or loan-based purchase, a lease provides for the use of the asset, but it does not result in ownership of the car or house. The provision under which a lessee can purchase his or her leased car (or other asset) at the end of the end of the lease period is called a purchase option. This provision will express the automobile’s purchase price either as a fixed-market price or as the vehicle’s residual value.  A rebate is an inducement to purchase that takes the form of a partial refund of a car’s purchase price.  A vehicle’s residual value is its estimated value at the end of the lease period.  The sales contract is the agreement used to purchase a car that details the offering price and all conditions of the offer; when the buyer and seller sign it, it establishes the terms of the legally binding transaction.  The sticker price on a vehicle is the popular name given to the manufacturer’s suggested retail price (MSRP), which is posted on a sticker on the vehicle’s window. From a negotiating perspective, this number is effectively worthless, since it has virtually nothing to do with the dealer’s invoiced cost for the vehicle. 2. Steps in the car-buying process For many of us, purchasing a car is the first major purchase that we will make, as well as the second-largest purchase, and the most frequent major expenditure that we will make during our lifetimes. In contrast, purchasing a house is usually our largest, or most valuable, major purchase, but most of us will buy many more cars than houses during our lifetimes. Due to their high costs and the fact that the majority, if not all, of these purchases are made on credit, mistakes made during these transactions can be extremely expensive and their effects felt for many years. Using a systematic process to evaluate these purchases helps reduce the potential of costly mistakes. The car-buying process can be broken down into four major steps: research, select, buy, and maintain. Step 3 1 4 2 Activities Inspect the vehicle for damage and missing items, such as the correct sound system, missing floor mats, or damaged pieces of trim. Determine the annual insurance premium on the brands and models being considered. Change the oil, rotate the tires, and replace the windshield wipers as needed. Test drive the car and meet the salesman at least once to ascertain if he or she is someone you want to do business with. 3. How much car can I afford? Before buying a car, it is critical that you determine both the complete price of the vehicle and what you can afford to spend. This information is essential in deciding whether to pay cash or finance the vehicle with a loan. The difference between these two methods of payment, however, is the difference between paying the car’s full price versus making a much smaller down payment and fitting the monthly payments into your budget. There are two schools of thought about how much car you can afford. Financial experts recommend that the amount of your car payment should not exceed 20% of your net monthly income. Others suggest that if you can accommodate the payment in your budget, then it’s acceptable—although you shouldn’t obligate yourself to eating rice cakes for the next four years. Amy is 55 years old, and her current gross monthly income is $2,800. Given an average personal tax rate of 28% for her federal, state, and local taxes, Amy’s net monthly income is $2,016. If she follows the advice of financial experts, what is the maximum amount that she should spend to purchase a new vehicle? $40 Gross monthly Income = $2,800 Gross yearly Income = 2800*12 = $33,600 Personal Tax = 28% Yearly tax paid = 0.28*33,600 = $9,408 Net annual income = Gross Yearly Income - Yearly Tax Net Annual Income = 33,600 – 9,408 =$24,192 Net monthly Income = Net Annual Income/12 = 24,192/12 Net monthly income = $2,016 Not exceeding 20% Net monthly Income = $2,016 Monthly tax paid = 0.20*2,016 = $403.2 Max car payment = $403 An alternative to the 20% rule is to evaluate your budget, determine a monthly payment that you can reasonably afford, and then incorporate that information with the maturity and interest rate of a possible loan to determine the value of the potential loan. When this value is added to a saved amount of a down payment, you know the total amount that you can reasonably afford to spend on a new car. To review this process, consider the following case: Amy’s Car-Buying Decisions Amy, who lives in San Francisco, is trying to decide between the following car models: Brand and Model Ford Fiesta Toyota Prius Kia Sorento Porsche Boxster Cost $13,580 19,895 23,150 48,100 She’s currently accumulated a down payment of $2,000 and she has determined that she can afford maximum payments of $475 per month. Her initial research on the current cost of auto loans has found that her lowest cost loan would be made by a savings and loan association and would require an interest rate of 6% for four years. Given this information, the maximum amount that Amy can afford to pay for her new car is $22,226, and the most expensive car that she can afford to purchase, without stretching her budget, is: The Toyota Prius However, she could upgrade to a more expensive model by undertaking several activities. Which of the following activities would allow this upgrade?Checkallthatapply. Take a better-paying job or another, or part-time, job that would give her the additional income to support a larger monthly payment 4. The lease versus purchase analysis - Part 1 Which is better: to lease or to buy? A car buyer has two financing alternatives: to lease or to purchase. Each has operational as well as financial advantages and disadvantages. Therefore, it is critical that you be able to compare them for yourself and make your own decision. Remember, a dealer will recommend the strategy that is most advantageous to him or her. You must protect your own interests. Statement: Generally, requires lower monthly payments and allows you to get more car for your money. Lease Transaction No mileage allowance or disposition fee associated with the transaction. Purchase Transaction 5. The lease versus purchase analysis - Part 2 Which is better: to lease or to buy? A car buyer has two financing alternatives: to lease or to purchase. It is important to evaluate all the options and analyze the consequences of lease versus purchase decision. The understanding of a comparative worksheet that analyzes the automobile lease versus purchase decision will help in making an informed choice. How should a lease-versus-purchase analysis be conducted? How can this worksheet be applied to help you or someone else make their financing decision? Consider the following scenario: Should Nick lease or purchase? Nick is considering the purchase of a Ford F-150 Pickup and has negotiated a final price of $27,690. He’s trying to decide whether to lease or purchase the vehicle. • If he leases, he’ll have to pay a $500 security deposit, a capital cost reduction (down payment) equal to 10% of the vehicle’s cost, and monthly payments of $375 over the four-year term of the closed-end lease. The truck will have a residual value of $11,076. • On the other hand, if he buys the truck, he’ll have to make a 10% down payment, pay sales tax equal to 7% of the vehicle’s price, and make monthly payments of $563 on a four-year loan that charges 4% interest. • Be aware that funds used as down payments and security deposits incur an opportunity cost of 5%, as they could have earned interest for Nick over the period of the lease or loan. LEASE Item Description Amount ($) Initial Payment 1a. Capital Cost Reduction 1b. Security Deposit $ 2,769 500 3,269 1c. Total Initial Payment 2. Number of Months in Lease 48 3. Monthly Lease Payment 375 4. Total Payments over Lease Term 5. Opportunity Cost of Initial 18,000 654 LEASE Item Description Amount ($) Payment 6. Estimated End-of-Term Charges 7. Total Cost of Leasing 0.00 $21,923 The total cost of the truck’s lease, $21,923, is based on the sum of (1) its capital cost reduction (down payment), if any; (2) its security deposit; (3) all of the monthly payments made over the term of the lease, and; (4) the opportunity cost of the funds used for the lease’s down payment and security deposit if they had been invested to earn 5% interest. The lease’s initial payment of $3,269 is calculated as the sum of the lease’s capital cost reduction, or down payment, of $2,769 and the $500 security deposit. That is: Lease Total Initial Payment = Capital Cost Reduction + Security Deposit = $2,769 + 500 = $3,269 The total of the monthly payments made over the life of the lease, $18,000, is calculated by multiplying the monthly lease payment by the number of months in the lease term: Lease Total Payment Monthly Lease Payment×(Years in Lease Term×12 months per year = s ) = $375×(4 years×12 months per year) = $18,000 The opportunity cost of the down payment and security deposit funds totals $654, and it is calculated as: Lease Ttl Opprtnty Cst = (Cptl Cst Rdctn + Scurty Dpst)×Intrst Rate Ernd Invstd Fnds×Lease Term = ($2,769+500)×5%×4 years = $654 Lease Total Cost =Total Initial Payment + Total Pymnts Ovr the Lease Trm + Opprtnty Cst of Total Initial Payment = $3,269 + 18,000 + 654 = $21,923 Therefore, the total cost of the truck’s lease is $21,923, which is calculated as: Amount ($) 27,690 PURCHASE 8. Item Description Purchase Price 9. Down Payment 2,769 10. Sales Tax on Purchase 1,938 11. Monthly Loan Payment 563 12. Total Payments over Term of Loan 27,024 13. Opportunity Cost of Down Payment 554 14. Estimated Vehicle Value at End of Loan 11,076 15. Total Cost of Purchase $21,209 The total cost of a purchase transaction, $21,209, is calculated as the sum of the down payment, the sales tax, the total of the payments made over the life of the loan, and the opportunity cost on the down payment minus the estimated value of the end of the loan term. The down payment and sales tax are calculated by multiplying the truck’s $27,690 price by 10% and 7%, respectively. Loan Down Payment = Price×Down Payment Rate = $27,690×10% = $2,769 Loan Sales Tax = Price×Sales Tax Rate = $27,690×0.07 = $1,938 As in the case of the lease, the total of the monthly payments made over the life of the loan, $27,024, is calculated by multiplying the monthly loan payment ($563) by the number of months in the term of the loan (48): Loan Total Payment = Monthly Loan Payment×(Years in Loan Term×12 months per year) s = $563×(4 years×12 months year) = $27,024 The opportunity cost of the down payment, $554. 2769 *5%*4 years Offsetting these costs is the truck’s expected residual value, $11,076, which is expected to be received at the end of the loan’s term. When the truck’s loan is repaid, the vehicle can be sold (or traded in) to generate $11,076 of cash for Nick. As a result, the amount of the residual value effectively reduces the total cost of the vehicle. Therefore, the total cost of the truck’s loan, $21,209, is calculated as: Total Cost of Purchas = e = = Dwn Pymnt + Ttl Sales Tax + Total Mnthly Pymnts + Opprt Cst Dwn Pymnt − Rsdl V lu $2,769 + 1,938 + 27,024 + 554 − 11,076 $21,209 Based on this analysis, Nick should:  Use the loan to purchase the truck, because its total cost is less than the total cost of a lease transaction. 6. Vocabulary - Purchasing property What does it mean? Description Term This occurs when the value of the real estate asset is lower than the loan amount due on that asset. Negative equity This policy is often provided by private insurers to protect the lenders against loss if the borrower defaults in making payments towards the loans. Private mortgage insurance This is a form of direct ownership of an individual unit in a multiunit project in which common areas and facilities, such as the lobbies, recreational areas, and facilities, are owned by all property owners in the project. Condominium This term refers to the transaction costs, including fees and expenses, incurred by the buyer during the purchase of a property that is over and above the price of the property. Closing costs This refers to the process in which a lender seizes and sells a property because the borrower cannot make the scheduled principal and interest payments. Foreclosure  A contingency clause in a real estate sales contract makes the agreement conditional on one or more factors or events. This clause protects the prospective buyer by making the sale contingent upon the occurrence or nonoccurrence of certain events, such as the availability of financing or the absence of termites or cracks in the foundation.  The money pledged by a potential house buyer to show his or her good faith when making an offer is called an earnest money deposit.  A lender’s loan-to-value ratio is the maximum percentage of the value of a property that the lender is willing to loan. Alternatively, it is the ratio of the maximum loan that a lender is willing to make to purchase a property divided by the cost of the property. For example, assume that the home that you’re considering buying costs $100,000, and your banker requires an 80% loan-to-value ratio. The maximum loan that the lender will offer in this situation is $80,000 ($100,000 x 80%).  Mortgage points is the general name used to refer to and quantify the fees charged by lenders and paid by borrowers when they take out a mortgage loan. One point is equal to 1% of the amount borrowed. In general, the greater the demand for mortgage funds compared to the available supply, the greater the number of points lenders demand. In periods of low demand for mortgage funds, lenders will charge few, if any, points.  A short sale is a real estate transaction in which a property or a dwelling is sold for a price that is less than the balance owed on the loan secured by the property. For example, while shopping for a new home, Sarah found a previously owned home that currently secures a $185,000 mortgage loan. The lender has accepted her offer of $155,000 and therefore has completed a short sale. 7. Rent versus buy - The theory behind the analysis Based on the theory, which is better: to rent or to buy? The decision of whether to rent or buy your housing is a personal decision that is based on both your lifestyle and your finances. While the financial aspect of the decision is important, it is important not to base your rent-or-buy decision solely on the numbers. Your personal needs and housing market conditions are important. The freedom to decide what, when, and what color you’re going to paint can’t be quantified, but it is very relevant to the rent-or-buy discussion. What are the theoretical and lifestyle aspects of the rent-versus-buy decision? Among the personal and lifestyle factors that are relevant to this decision are: • Your desire for privacy • Your desire to fix up your living space and make it your own • The personal satisfaction that results from homeownership Maria and Spouse Maria and her husband are trying to decide whether to rent or to purchase a new standalone house. As 30-somethings, they have just relocated to a new city to accommodate their jobs and have had their first child. Their current bills consume 90% of their combined monthly incomes, and they used virtually all of their savings to pay their pregnancy-related medical expenses. Based solely on these factors and assuming that everything else remained constant, should Maria and her spouse rent or purchase? Rent Ana Ana is trying to decide whether to rent or to purchase a new townhouse. To help make her decision, she’s been watching current and expected future mortgage interest rates and home values. Her interpretation of the data suggests that interest rates are likely to decrease in the next three months, while home values are likely to increase. Based solely on these factors and assuming that everything else remained constant, should Ana rent or purchase? Purchase Several financial or economic factors are relevant to the rent-or-buy decision. From the following list, identify the financial or economic factors that should be considered when performing this analysis.Checkallthatapply.  Current and expected future housing-related tax deductions   Current and expected future housing prices The pride that comes from owning your own home 8. The benefits and costs of homeownership What are the benefits and costs associated with home ownership? Purchasing a home is an investment. It should be made with the same knowledge, objectivity, and deliberation that you would apply to the purchase of stocks, bonds, or life insurance policies. Knowledge of the general costs and benefits associated with owning a home is necessary to make an informed investment decision. What are the benefits associated with homeownership? Owning a home offers physical and psychological as well as financial benefits. Among the physical benefits are shelter and security, while the psychological benefits include:   Flexibility and a lack of long-term commitment A feeling of stability and a sense of permanence Homes also provide financial benefits, including serving as a hedge against inflation and a shelter from taxes. The hedge against inflation occurs, because the price of houses generally increase at a rate equal to or greater than the rate of inflation, while the tax shelter results from the tax deductibility of the:     Down payment paid to purchase the home Home maintenance and repair expenses Property taxes paid on the home Insurance premiums paid to protect the home and your contents This treatment on your federal and, in most states, state income taxes results in a reduced taxable income and tax obligation. However, to realize the full value of this benefit, you must itemize your deductions. What are the costs of homeownership? The five types of costs associated with homeownership are: • the down payment • closing costs, including the points required by the lender; • The monthly mortgage payments  • the property taxes and insurance premiums • the maintenance and operating expenses With regard to these costs:  Mortgage lenders vary in the types and characteristics of the mortgage loans offered. However, virtually every mortgage lender requires a prospective homebuyer to invest some of his or her own money as a down payment. The funds contributed by the homebuyer are called equity and depend on the lender’s loan-to-value ratio. The relationship between the lender’s required down payment (DP) and its loan-to-value     (LTV) ratio can be expressed as DP = 100% – LTV. The non-interest-related lender fees, which increase with borrower demand, are equal to 1% of the amount borrowed, and are included in the borrower’s closing costs, are called points. Lenders use different combinations of these fees and loan rates to generate additional income for themselves and additional financial choice for their borrowing customers. However, these fees increase the mortgage’s effective interest rate. The standard monthly mortgage payment usually includes PITI, in which P stands for principal, I stands for interest, and T stands for property taxes. The cost of the final I, which stands for insurance, depends on the house’s age, location, construction, and geographic location. A house’s operating expenses, which include its electricity, gas, sewage, and water utilities, are a large and recurring cost. To better anticipate the total cost of possible target homes, it is important that you obtain prepurchase estimates of these costs. Homeowner’s insurance is required by the mortgage lender and covers the replacement value of the home and its contents. An important limitation of the homeowner’s policy is that it does not protect the insured’s land. 9. Rent versus buy analysis - Part 1 Which is better: to rent or to buy? The decision of whether to rent or buy housing is a personal decision that is based on both your lifestyle and your finances. While most financial experts argue that the financial aspect of the decision is important, it is also important not to base your rent-orbuy decision solely on the numbers. Your personal needs and housing market conditions are important. However, it is still necessary to perform the financial analysis. Before you conduct a rent-or-buy analysis, it is critical that you understand how the U.S. tax code creates tax shelters for homeowners. The tax deductibility of the interest paid on a mortgage and the property taxes incurred on your home create a tax shelter for the homeowner, which reduces your taxable income and tax liability. The standard deduction for mortgage interest under the 2018 U.S. tax code is:  $12,000 for single individuals and $24,000 for married couples filing jointly True or False: Because of the new tax law in 2018, the actual amount of mortgage interest that could be deducted by most U.S. taxpaying homeowners is less than the standard interest deduction allowed by the Internal Revenue Service (IRS).  This statement is true, which means that most taxpayers in this situation are better off taking the standard deduction rather than itemizing their deductions. Explanation: According to the 2018 U.S. tax code, the standard mortgage interest deduction is $12,000 for single taxpayers and twice that, or $24,000, for a married couple filing jointly. Because of the new tax law in 2018, only 10 percent of taxpayers will choose to itemize their deductions compared with roughly 30 percent in past years. This is due in part to the fact that the actual amount of mortgage interest that could be deducted by most U.S. taxpaying homeowners is now lower than the increased standard interest deduction allowed by the IRS, making it more attractive for most taxpayers, even homeowners, to take the standard deduction. 10. Rent versus buy analysis - Part 2 Which is better: to rent or to buy? The decision of whether to rent or buy housing is a personal decision that is based on both your lifestyle and your finances. While most financial experts argue that the financial aspect of the decision is important, it is also important not to base your rent-orbuy decision solely on the numbers. Your personal needs and housing market conditions are important. However, it is still necessary to perform the financial analysis. Hubert and his wife are trying to decide whether to rent or to purchase a new townhouse. After looking for several months, they’ve narrowed their choice down to one particular house, and the builder is willing to lease or sell—depending upon the preference of the buyer. To perform a rent-or-buy analysis, Hubert and his wife have collected the following information: • If they rent, the builder will require monthly rental payments of $1,300 and a security deposit equal to two months of rent. • Since they want to be protected against the possible loss of their possessions, they will purchase a renters’ policy of $200 every six months, while a more comprehensive homeowners’ policy will cost 0.5% of the home’s value per year. • Money used to fund the house’s security deposit could otherwise be invested to earn 5% per year after taxes. Funds expended for a home’s down payment and closing costs also incur an opportunity cost. • If the house is purchased, it will cost $247,000 and will require a 20% down payment. The loan will carry an interest rate of 6%, a term of 30 years, and monthly payments of $1,185. The closing costs associated with the house’s mortgage will be $3,500. • The property taxes and the maintenance and repair expenses on the house are estimated to be 3% and 2% of the house’s total price, respectively. • Your ordinary income is taxed at the rate of 28%, and you’ll be willing to itemize your tax deductions in the event that you purchase your new home. • Financial publications report that home values are expected to increase by 3% this year due to inflation. Amou nt COST OF RENTING ($) Security deposit $2,60 0 Annual rental cost 15,60 0 Renter’s insurance 400 Opportunity cost on security deposit 130 Total Annual Cost of Renting: $16,1 30 To see how the Total Annual Cost of Renting is calculated, consider the following four component calculations. Remember: The house’s total annual rental cost, $15,600, is calculated as the product of its monthly rent and 12 months per year ($1,300 per month x 12 months). Furthermore, as the renter’s insurance policy for Hubert and his wife is expected to cost $200 every six months, the cost must be doubled to provide its 12-month cost ($200 per sixmonth period x 2 six-month periods per year), $400. The final relevant cost, the opportunity cost of the funds committed as the house’s security deposit, represents the after-tax return that could be earned if the funds tied up as the house’s security deposit were invested to earn 5%. As the required security deposit is equal to two months of monthly rent, or $2,600 ($1,300 per month x 2 months), then the opportunity cost would equal $130 ($2,600 x 5%). TotalAnnualCostofR AnnualRentalPayments+Renter’sInsurance+SecurityDeposit’s enting=OpportunityCost  = $15,600+400+130  $16,130 = Therefore, the Total Annual Cost of Renting, $16,130, is calculated as: In contrast, the Total Annual Cost of Purchasing the townhouse totals $15,281 and reflects the sum of the total costs associated with the purchase ($30,450) minus the total deductions ($7,759) and the expected appreciation in the value of the home as a result of inflation ($7,410). RENT-OR-BUY ANALYSIS FOR HOUSING Amoun t COST OF BUYING Monthly mortgage payment ($) $1,18 5 Annual mortgage payments 14,22 0 Amoun t COST OF BUYING ($) Property taxes 7,410 Homeowner’s insurance 1,235 Maintenance expenses 4,940 After-tax costs of interest on down payment 2,645 and closing costs Total costs 30,45 0 Less Reduction of loan principal 2,364 Tax savings on mortgage interest deduction 3,320 Tax saving on property tax deduction 2,075 Total deductions 7,759 Annual after-tax cost of homeownership 22,69 1 Estimated annual appreciation in home value 7,410 Total Annual Cost of Purchasing: $15,2 81 Remember, the townhouse is expected to cost $247,000, which will be paid for using a $49,400, or 20%, down payment and a $197,600 6% 30-year mortgage, which requires monthly payments of $1,185 and $3,500 in closing costs. To see how the values above were computed, consider the following component calculations: The amount of annual mortgage payments, $14,220, is calculated as the product of the monthly mortgage payment and 12 months per year ($1,185 per month x 12 months per year). The house’s property taxes, homeowner’s insurance, and maintenance expenses are calculated as 3% of the home’s value, or $7,410, 0.5% of the home’s value, or $1,235, and 2% of the home’s value, or $4,940, respectively. That is: Annual Property Taxes = $247,000 × 0.03 = $7,410 Annual Insurance Premium = $247,000×0.005 = $1,235 Annual Maintenance Expense = $247,000 × 0.02 = $4,940 The after-tax opportunity cost of the funds committed and set aside as the down payment and the transaction’s closing costs is $2,645, which is computed as the product of the sum of the down payment and closing costs ($49,400 + 3,500) and the opportunity cost of funds (5%). The gross annual costs associated with the purchase of the house is $30,450, which is the sum of the annual mortgage payments, property taxes, homeowner’s insurance, maintenance and repair expenses, and the opportunity cost of the funds tied up as the sum of the down payment and closing costs. That is: Gross Annual Purchasing Cos Mortgage Payments + Taxes + Insurance + Maintenance + Opportunity C = ts osts = $14,220+7,410+1,235+4,940+2,645 = $30,450 Several deductions are subtracted from the Gross Annual Purchasing Costs, including the principal repaid on the loan and the tax savings created by the tax deductibility of the interest paid on the mortgage and the property taxes paid on the property. For example: The principal reduction in the loan balance, $2,364, is calculated as the difference between the annual mortgage payments ($14,220) made during a year and the interest paid on the mortgage during the year (6% x $197,600). The tax deductions and savings created by the tax deductibility of the interest paid on the mortgage and the property taxes paid on the property are created by multiplying the accumulated interest expense paid each year or the amount of property taxes paid each year by the couple’s annual tax rate. That is: Interest Tax Savings = Annual Interest Paid × Tax Rate = $11,856 × 28% $11,856 × 28% = $3,320$3,320 Property-Tax Tax Saving = Annual Property Tax Paid × Tax Rate s = $7,410 × 28%$7,410 × 28% = $2,075$2,075 The final deduction, or offset, from the home’s gross annual buying costs is the estimated annual appreciation in home value resulting from inflation. It is calculated as the product of the home’s value and the anticipated rate of inflation during the year. Based on published forecasts, Hubert and his wife expect their house to appreciate by 3%, or $7,410 ($247,000 x 3%), during the year. Therefore, the Total Annual Cost of Purchasing, $15,281, is calculated as: Total Annual Cost of Buyin = Total Costs – Total Deductions – Home’s Appreciation in Value g Total Costs – (Reduction of Loan Principal + Interest Tax Savings from Interest = + Property Tax Savings) – Appreciation in Value = $30,450−(2,364+3,320 + 2,075)−7,410 = $15,281 Based on this analysis, Hubert and his wife should:  Purchase the home, as the total cost of purchasing is less than the cost of renting.