Kim and Dan the Price Term Paper

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But, the family must also consider that the interest rate is variable and is subject to inflation indexation in case of high market volatility and thus future monthly payments of the family may increase significantly if the risks of the lender increase. Presently the Federal Reserve discount rate is increasing constantly and there is overall tendency to growing cost of financial resources in international markets which can further push interest rates upwards and the family will have very high mortgage servicing costs.

The renting option would include $1,400 per month plus utilities of $220 and insurance of $25, thus overall monthly payments of $1,645, while mortgage servicing and utilities costs are $2,758. Presently they are purchasing a house for $280,000 and it is expected to increase in value by 3% annually, or up to $324,500 approximately by the end of the fifth year. This means that their rental payments will also grow by 3% annually and will amount to $1,622 rental payments in five years' time. If the family does not use the money it generated in the money market fund and keeps earning 5% annual interest on it, in some years the family gross income will exceed present 25% tax rate and they will keep only 55% of marginal income received.

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This income still will offset much of the rental expenses to be incurred by renting.

As the property value is expected to grow at annual 3% rate and though maintenance expenses grow and rental payments also grow, but considering the fact that annuity payments remain the same, it is more beneficial for the family to buy the property at offered loan. Furthermore, if the family considers the risk to be too high, thus there are expectations to increasing interest rates and growing property prices, while no expectations to growing wages, the family will find it less affordable to purchase housing within five years' term and it should do it now. It is necessary to consider that there is certain risk of increasing interest rates, but this risk is still less than the premium of buying the property rather than renting it. If the family wishes to leave this place in one year, the family is better off renting this place as purchase….....

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