MAT 245 Module 5 Housing and Major Purchases Example

Own the Roof or Rent It: A Housing Decision and a Car Plan Measured in Unrecoverable Dollars

Student Name

Business Administration Program, Aspen University

MAT 245: Personal Finance

Instructor Name

Month Day, Year

Own the Roof or Rent It: A Housing Decision and a Car Plan Measured in Unrecoverable Dollars

Taylor Monroe's fifth goal, set in Module 1, was a $30,000 house fund within five years. With the credit card cleared in Module 4 and the emergency fund growing, that goal is now in sight, and Taylor's parents keep saying that rent is money thrown away. A coworker recently bought a condominium and talks about building equity. Taylor's car, meanwhile, has 98,000 miles, and its loan ends in two years. This paper answers two questions with numbers: whether buying a home in five years makes financial sense, and how to replace the car without paying more than necessary. The person and figures are composites for teaching, not advice for any real household.

The Two Housing Paths

Taylor rents a one-bedroom apartment in Clintonville for $1,250 a month, with renter's insurance included in that figure. The apartment is close to the practice, the landlord handles repairs and Taylor can move with sixty days' notice. The alternative is a two-bedroom condominium about ten minutes from work, listed at $230,000. A 10% down payment of $23,000 and closing costs near $7,000 would use the full $30,000 fund. The remaining $207,000 would be borrowed on a thirty-year fixed loan at 6.5%.

Why the Payment Is the Wrong Comparison

The monthly principal and interest payment on that loan is about $1,308. Add property tax of roughly $345 a month, condominium insurance of $40, an association fee of $250 and private mortgage insurance of about $86, and the total check each month is close to $2,030. Set beside $1,250 of rent, owning looks almost $800 a month more expensive. That comparison misleads, because part of the mortgage payment, about $190 a month in the first year, reduces the loan balance and stays Taylor's as equity. The fair comparison sets the costs of renting that never come back against the costs of owning that never come back.

Unrecoverable Costs, First Year

What the Gap Means

Owning costs Taylor about $10,500 more per year in money that does not come back. For buying to win, the condominium would have to gain enough in value to cover that gap, roughly 4.5% of its price every year, before counting the cost of selling. Prices in Columbus have risen quickly in some recent years, but no plan should assume that pace will last. Taylor would also pay the mortgage interest and tax with after-tax dollars in practice, because for a single filer those itemized deductions barely exceed the standard deduction and add little benefit. On these figures, buying this condominium is a bet on rising prices rather than a savings plan.

The Break-Even Horizon

Selling a home costs about 6% to 8% of its price in agent commissions, transfer taxes and moving costs, or roughly $15,000 on this condominium. That cost is paid once, so it weighs heavily on a short stay and lightly on a long one. If Taylor bought and sold within three years, the selling cost alone would wipe out the equity built through principal payments in that time. Ownership becomes reasonable only under three conditions together: a longer expected stay of seven years or more, a purchase price whose unrecoverable costs are close to the rent for a comparable place, and a payment that leaves the other goals funded. Taylor is weighing a return to school for a bachelor's degree, which could mean moving, so the first condition is not yet met.

Shopping for the Loan

If the conditions are met later, the way the loan is chosen will matter. Agarwal et al. (2017) studied borrowers who decided whether to pay points, an upfront fee in exchange for a lower interest rate. Points pay off only for a borrower who keeps the loan long enough for the monthly savings to exceed the fee. Many borrowers who paid points sold the home or refinanced too soon to come out ahead, and the mistakes were more common among borrowers with less financial sophistication. For Taylor, who may move within a few years, paying points is unlikely to make sense.

Woodward and Hall (2012) examined fees on mortgages insured by the Federal Housing Administration. Borrowers who seemed confused by the split between upfront charges and the interest rate, and who collected few quotes, paid noticeably more for comparable loans than borrowers who shopped more, and the authors estimated that obtaining quotes from more lenders would have saved many borrowers substantial sums. Taylor's plan is to request a Loan Estimate from at least three lenders on the same day, because the standard form puts the rate, points and closing costs in the same places for easy comparison.

The Car Decision

Taylor's sedan, worth about $9,000 today, has 98,000 miles and has needed only routine repairs. Replacing it now would add a second loan just as the card is paid off. The plan is to keep the car until the loan ends in two years and then keep making the $240 payment to a car savings account for twelve more months, building roughly $2,900 plus the trade-in value as cash for the next car. Driving a paid-off car for a year while saving the old payment is the cheapest way to break the cycle of always having a car loan.

Buying the Next Car

Lacetera et al. (2012) analyzed more than twenty million wholesale used-car auction sales and found that prices dropped discontinuously as the odometer crossed each 10,000-mile mark, by more than the extra miles could explain. Buyers appeared to focus on the leftmost digit and pay little attention to the rest. For Taylor, the finding is a search rule: a car showing 40,200 miles is nearly the same car as one at 39,800 but tends to be priced lower. Taylor will look at three-year-old sedans with reliability records, compare the total cost of price, insurance, fuel and expected repairs over six years and arrange credit union financing before visiting a dealer, so the dealer's financing offer has to beat a known number.

Purchase Checklist

Recommendation

Taylor should keep renting for now and keep filling the house fund, which will earn interest in a high-yield savings account and remain available if a return to school or a move changes the plan. The question should be reopened when Taylor expects to stay in Columbus for seven years or longer, or if condominium prices fall relative to rents. The car should be kept until its loan is paid and then replaced with cash saved from its own payment.

Conclusion

Renting is not throwing money away; it is paying for flexibility, and owning carries its own unrecoverable costs. Comparing those costs side by side shows that buying this condominium would cost Taylor about $10,500 more per year than renting. Agarwal and colleagues, Woodward and Hall and Lacetera and colleagues show where buyers lose money and how a careful buyer can avoid it.

References

Agarwal, S., Ben-David, I., & Yao, V. (2017). Systematic mistakes in the mortgage market and lack of financial sophistication. Journal of Financial Economics, 123(1), 42-58. https://doi.org/10.1016/j.jfineco.2016.01.028

Lacetera, N., Pope, D. G., & Sydnor, J. R. (2012). Heuristic thinking and limited attention in the car market. American Economic Review, 102(5), 2206-2236. https://doi.org/10.1257/aer.102.5.2206

Woodward, S. E., & Hall, R. E. (2012). Diagnosing consumer confusion and sub-optimal shopping effort: Theory and mortgage-market evidence. American Economic Review, 102(7), 3249-3276. https://doi.org/10.1257/aer.102.7.3249