Arya got a new job in Charlotte. She is trying to decide whether she should rent or buy a house. Because her contract is for five years, she is going to stay in the place she gets for five years and then move again (assume she leaves right at the end of five years). If she rents, she will owe a $3,000 security deposit immediately and her rent is $2,050 per month. To buy, she is considering a house that costs $500,000 (and its market value will be stable through the investment). She would put 10% down (i.e., only 90% of the purchase price is financed) and owe $6,000 in closing costs (assume she pays these whether buying or selling). Her lender has offered her the following: 3.75% fixed for 30 years, 3.60% for 30 years by buying 1 point, or 3.25% on a 5/1 ARM (30 year term). All rates are compounded monthly. In NC the seller pays a 6% commission to the realtor.
Should she rent or buy? Use cash flows to decide (You can find an NPV). (You can sketch out every possible interest rate, but you should be able to reason down to one rate beforehand (put some in the box to the right). This means you only compare renting to one buying scenario. Ignore taxes for now, but remember, the tax code favors home purchases. How? Why?)