Read the HBR case study Time Value of Money: The Buy Versus Rent Decision and calculate the best route for the graduate’s housing situation, developing your understanding of time value of money (TVM) concepts and calculations. Describe your assumptions, methodology, and results in your discussion narrative, and attach a simple spreadsheet supporting your analysis.
Reply to these two statments:
Making the decision to rent or buy is a tough one, but one that many of us will face in our lifetime. There are pros and cons to each, and it is important that, when making the decision, one considers every penny that may be involved. In Rebecca’s case, she would be financing the home at $480,000 ($600,000, less 20% down). With a 25 year mortgage, Rebecca would be making payments for 300 months. To calculate her monthly payment, I took the $480,000 and divided it by 300 months to get a total of $1,600. I then added the $1,055 monthly condo fees, and $300 monthly taxes to get a total monthly payment of $2,955 before interest.
Rebecca has other factors to consider, as well. For instance, her annual interest payment would be $19,200. In 10 years, that is a total of $192,000. However, if Rebecca pays more than the minimum monthly payment, and applies the excess to the principal of the loan, her overall interest paid would be less. From my standpoint, homes typically hold their value, or can build equity. Therefore, her payments would be going toward ownership, and the chance of reselling and making a return would be possible – unlike renting. In my opinion, the best decision Rebecca can make is to buy.’
Cleary, S., & Foerster, S. (2015, June 5). Time Value Of Money: The Buy Versus Rent Decision. Retrieved February 7, 2017, from Harvard Business Publishing: https://cb.hbsp.harvard.edu/cbmp/context/coursepacks/56980459
When it comes to trying to figure out if its best to buy or rent, I believe is a struggle that everyone goes through. In Rebecca Young’s situation, looking at paying $3000 a month in rent, or purchasing a home in the amount of $600,000 with a 20 percent down payment. I would really look at the long term aspects of things. You will gain equity in the home, which is what/or how much of the home you own. So in the1st year $151,451 (down payment), 2nd year 181,914 5th year $279,732, and the 10th year $466,563, so Rebecca will not just being paying rent for something she will never own. With Rebecca placing a large down payment on the home she is not only reducing the amount of payment, but she is also reducing the amount of debt (loan amount). With all is said in done, Rebecca will be paying less on a monthly Mortgage then should would if she was renting a condo by almost 500 a month.