You are contemplating whether to use the $25,000 you have saved to make a down p

Question

You are contemplating whether to use the $25,000 you have saved to make a down payment on a house, or invest the money in a mutual fund and continue renting longer. The mutual fund has been averaging a return of 8% annually, and the interest rate on the mortgage is 5%. Your monthly house payment and your current rent is the same amount each month. What would you decide to do or do you need additional information to make your decision? want you to answer in a full paragraph and explain what factors you would consider in making hope to prompt is a discussion between class members about what considerations are here module if you don't recall how your discussions will be graded this decision. In case you are wondering, there isn't one "right" answer to this: instead, what important in the decision making process. Please review the grading criteria listed in the start Search entries or author Unread Reply Replies are only visible to those who have posted at least one reply.

Explanation / Answer

An important distinction that needs to be made in this choice is that:

Rent is an expense and paying monthly installments for your flat is creating an Asset.
The rent expense is unlikely to stop as long as you need a place to stay. However, the monthly installment that you are to pay if you buy a house (and pay a portion of it in downpayment) will last only till the term of your loan lasts;

In the above case, we have 25,000$ that can be invested in a mutual fund that grows at 8% of it can be used to make a down payment of a house whose mortgage rate is 5%;
It has been given that your monthly house payment and your current rent is the same amount;

Case 1: You stick to mutual fund;
Your asset of 25,000$ will keep growing at 8% every year. Your monthly outflow of rent too will continue every year;
So yearly, your return will be 8% of 25000 = 2000$

Case 2: You pay 25,000$ as downpayment for a 5% mortgage; That way, the 5% that you pay on the mortgage will result in a net lower amount as you will now have lower mortgage amount since it will be reduced by 25,000$;
So in this case, your will have to pay 5% of 25000 = 1250$ of installment less.


Conclusion: Now, if you compare 2000$ of case 1 with 1250$ of case 2, you will find the 2000$ of case 1 to be a better deal. However, you need to remember that the mortgage payment (EMI) will not continue forever as you continue paying EMIs, you will have completed the loan tenure by that time. Upon completing this loan tenture, you will have an OWN HOUSE of your own, and you will not be required to pay the rent anymore.
So, here you will have an ASSET (an own home) and lower expense (since no rent is to be paid);

Thus, more information is required, like price of the loan, rent amount, loan amount, loan tenure etc.

Without this info, it is not possible to tell which of the two cases is better.

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