Question

scenario: long-term cost comparison of homeownership vs. renting
sarahi is considering whether to buy a townhouse for $400,000 or continue to rent an apartment for $1,800 per month. she wants to understand the financial implications of both options over the next 30 years, considering various costs and expected rate changes.
homeownership details:

• purchase price: $400,000
• down payment: 20% ($80,000)
• mortgage interest rate: 3.75% annually
• loan term: 30 years
• monthly mortgage payment: $1,481.97, calculated based on the terms above
• closing costs: 2% of the purchase price
• annual property taxes: 1.25% of the property value, adjusted annually for a 2% increase in property value
• home insurance: $1,000 annually, with a 3% increase per year
• hoa fees: $150 per month

what trend does the graph indicate about the cost difference between renting and homeownership over time?
options:

• cost difference decreases over time
• cost difference remains constant over time
• cost difference fluctuates significantly over time
• cost difference increases over time

Explanation:

For renting, the monthly cost is fixed at $1,800 (assuming no rent increase for simplicity here). For homeownership, the mortgage payment is fixed at $1,481.97 monthly, but property taxes, home insurance, etc., have annual increases. However, over time, as the mortgage is paid down and the "cost" of ownership (vs renting) in terms of the difference: initially, homeownership has more upfront and some ongoing costs, but as time passes, the fixed mortgage (vs potential rent increases) and building equity mean the difference between renting and homeownership costs (what you'd pay for each) decreases. So the trend is the cost difference decreases over time.

Answer:

cost difference decreases over time