Megan and Kevin are considering the purchase of a home. They are not sure they should be considering

... a purchase this soon in their financial lives . . . .and would like to know how much home they can afford.

They have asked you to assist them with consideration of the pros and cons of renting vs. buying a home at the present time.They are willing to consider using the funds in Megan's Fidelity Magellan fund for the down payment and closing costs.

They have already visited with a loan officer and have learned that a minimum down payment of 10% will be required. Their interest rate on a 30 year fixed rate mortgage would be 7%, and they have been told to estimate that annual property taxes would run approximately 2% of the purchase price; annual homeowner's insurance would run approximately 1/2% of the purchase price; and annual maintenance would be another 1/2% of the purchase price. (Note that since this is a loan in excess of 80% loan-to-value ratio, Private Mortgage Insurance will be required and has already been contemplated in the stated interest rate and estimated closing costs.)

1. They have found one home that they like, which is priced at $135,000. Using the above assumptions, and estimating closing costs @ $4,000, your task is to assist the Lees by preparing a rent vs. buy analysis. Megan and Kevin estimate the after-tax cost of investment income on the down payment and closing costs would be 8% and the annual appreciation on the new home would be 3%. You already have information concerning their current rental expense. You may assume a marginal tax bracket of 28% and that they will continue to itemize deductions. (Use Worksheet 5.2, if you wish, to assist you.)

2. Using the above numerical assumptions, and using the debt ratio analysis process discussed in this week's on-line lecture, what is the maximum home purchase price you feel that the Lees can afford? You may estimate monthly tax and insurance payment at $275. (Use Worksheet 5.3, if you wish, to assist you.)

3. Aside from the results of the number-crunching exercises you have just completed, what are the pros and cons of a purchase at this particular time for the Lees?