Buying vs. Renting
In this project you will create an Excel Workbook consisting of two sheets. You will then use it to perform various financial calculations and answer 10 questions. Specifically, you will be examining whether it is better to buy a home or rent, depending on things such as income, property and income taxes, appreciation, annual percentage rate, etc.
In addition to your completed project, you must compose a response to the Project 3 Discussion Board prompt and respond to at least two of your classmates’ post with a substantive reply to each.
Project 3 – Buying vs. Renting
Objective: In this project you will create an Excel Workbook consisting of two worksheets. You will then use it to perform various financial calculations and answer the questions below. Specifically, it will be used to examine whether it is better to buy a home or rent, depending on things such as income, property and income taxes, appreciation, annual percentage rate, etc.
Submission: Your final submission should be a pdf containing the answers to each question below, and the Excel Workbook you created to answer the questions. Title your answers pdf as “Project 3 Answers – (your last name)”, and title your Excel Workbook as “Project 3 Workbook – (your last name)”.
Your answers to each question should be given in complete sentences. If your answer is calculated by Excel, reference the cell you got the answer from. If you calculated the answer by hand using a formula or basic arithmetic, be sure to show enough work to justify your answer. The workbook will contain two worksheets within it (details on this are given throughout the questions).
Project 3 –Buying versus Renting
Mortgages and Taxes: Deb and Rusty have just gotten married and wish to buy a home. They both work in Boston and have a combined income of $90,000. They found a modest starter house which they are buying for $350,000.
1.They plan to use their $40,000 is savings to cover the closing costs the bank will charge them, which are 1% of the amount they borrow from the bank. The rest of the savings will be used as a down payment. For example, if they borrow $330,000 using $20,000 for a down payment, the closing costs will be $3,300, which still leaves them some savings. Determine the largest amount they can use for a down payment and still pay the closing costs.
2.Open Excel and create a 20 year amortization schedule, giving monthly payments for the amount they borrowed at a 4.5% annual interest rate. Title this worksheet Amortization. For your answer to this question write “See Excel Workbook”.
3.Use the amortization schedule to compute the total amount of interest they will pay to the bank over the 20 years.
4.Deb and Rusty know that buying a house will save them money on taxes because they get to deduct the interest they pay to the bank each year and the property taxes they pay each year. First create a separate worksheet from the amortization schedule. Title this worksheet Analysis. In this worksheet, create a column titled Income starting at $90,000 and increasing at 3% for 20 years.
What is their income after 20 years?
5.Next create the following columns in your new Excel worksheet. For your answer to this question write “See Excel Workbook”.
•Property Taxes which are currently $3,100 a year and will also increase by 3% a year.
•Interest paid to the bank each year (careful here, your amortization schedule is monthly).
•Yearly Deduction: Do a Google search for Standard Deduction for current year/married filing jointly
•Taxable Income (Taxable Income = Income –Deductions).
6.Go to www.savewealth.com click on Tax Forms, Income Tax Rates, and then Married Filing Jointly to find the tax formula for Deb and Rusty. Create a column computing the yearly Federal Income Taxes.
7.Assume the rent is now $1000 a month and will increase by 3% each year. Compute theiryearlyfederal income taxes (which are higher when renting because they don’t have the deductions).
8.By renting they are saving a lot of money each year! They pay less for rent than a mortgage, and they don’t pay property taxes (they do however pay more in income tax). Assume the extra money (include the $40,000 in savings as initial deposit) theyhave from renting versus buying is all invested at 10% a year, and every year their extra money is added to this account. Create a column titled Extra Money. How much extra money do they have after 20 years?
9.Assume the house increases in value by 3% a year. Which option ends up with more money for Deb and Rusty to retire on assuming they sell the house after 20 years?
10.Write a paragraph or two reflecting on this assignment. Were there any calculations that were surprising to you? Do you feel this analysis leaves out anything important (this could be something financial that wasn’t included, or something related to quality of life)? For instance, renting might allow for more freedom or flexibility, while buying makes some people feel more secure. Give your opinion about how the analysis might be improved, or explain what aspects of their decision are important but cannot be analyzed numerically.
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