Renting or Owning a Home 6.2

Cost of Home Ownership Terms/Information to know: Expenses to a homeowner Two less obvious expenses: Depreciation Loss of income on the $ invested. Equity

Cost of Home Ownership (Example) Hansen’s want to buy a home… (see Example in your packet) First -------Add all the expenses: $5,244 Mortgage interest $2,350 Property taxes $360 Insurance $1,240 Depreciation $1,710 Utilities $1,535 Maintenance, repairs $1,270 Lost interest $13,709 Total Expenses

Cost of Home Ownership (Example - Continued) Second -------Subtract the tax savings from the total expenses: $13,709 Total expenses - $1,428 Tax Reductions $12,281 Net cost for the first year

Check For Understanding (Solution A) Find their net cost of home ownership for the first year. (See packet for Scenario) Add all the expenses $6,848 + $3,782 + $560 + $1,790 + $1,300 + $2,050 + $1,320 = $17,892 (total expenses) Subtract the tax savings from the total expenses $17,892 - $1,320 = $16,572

Check For Understanding (Solution B) What will be the net cost of the home the first year? Add all the expenses: $5,788 + $1,904 + $347 + $1,140 + (.02 x $87,000) + $900 + $1,860 = $13,679 Subtract the tax savings $13,679 - $1,050 = $12,629

Costs of Property Rental Advantages No down payment Earn interest on down payment More predictable major housing costs Disadvantages No federal income tax benefit Security Deposit – without guarantee on return. Sign a lease or rental agreement

Costs of Property Rental (Example) May plans to rent an apartment for $710/ month includes heat and water. Security deposit is 1 months rent. Other annual costs equal = Insurance $110 Utilities $600 Covered parking space $ 240 What is the total first year cost of renting this apartment? How much is it per month?

Costs of Property Rental (Solution) What is the total first year cost of renting this apartment? # of months per year x monthly rent = yearly rent 12 x $710 = $8,520 Add all annual costs + yearly rent = Total 1st year costs. $8,520 + $710 + $110 + $600 + $240 = $10,180

Costs of Property Rental (Solution) How much is it per month? Total 1st year costs / 12 = monthly costs $10,180/12 = $848.33

Check For Understanding (Solution C) What was the cost of renting the apartment for the one year? # of months per year x monthly rent = yearly rent 12 x $625 = $7,500 Add all annual costs + yearly rent = Total 1st year costs. $7,500 + $625 + $85 + $1,210 + $10 = $9,430

Check For Understanding (Solution D) What will be her first-year costs of renting this home? # of months per year x monthly rent = yearly rent 12 x $1,250 = $15,000 Add all annual costs + yearly rent = Total 1st year costs. $15,000 + $1,250 + (12 x $100) + $136 + $1,700= $19,286

Comparing Renting and Owning Homes Costs are not always the same You can still compare Why do you think we want to compare? versus

Comparing Renting and Owning Homes (Example) $17,000 Down Payment $85,000 house Interest/year on mortgage = $5,184 Property Taxes $1,720 Other costs $3,270 Lose $680 interest $850/ month $1,200 security deposit Annual expenses Insurance $130 Utilities $1,400

Comparing Renting and Owning Homes (Question & Solution) Is it less expensive to rent or buy the home? What is the difference? Find net cost of home ownership (add expenses)- tax savings = net cost ($5,184 + $1,720 + $3,270 + $680) - $895 = $9,959

Comparing Renting and Owning Homes (Question & Solution 2) Is it less expensive to rent or buy the home? What is the difference? 1. Find the net cost of renting (annual rent) 12 x cost/month = annual rent 12 x $850 = $10,200 Annual costs + annual rent = cost of renting $10,200 + $1,200 + $130 +$1,400 = $12,930

Comparing Renting and Owning Homes (Question & Solution 2) Is it less expensive to rent or buy the home? What is the difference? Cost of owning = $9,959 Cost of renting = $12,930 It is less expensive to OWN Difference is $12,930 - $9,959 = $2,971