Viola has to relocate for her job. She finds a townhome with an option to rent or buy. The conditions of each are shown below. Rent: Move-in costs of
- Buy: Move-in costs of
- Viola moves frequently due to her job, but she thinks that she will stay in the area for 4 years. Therefore, she decided to buy. Choose the best evaluation of Viola’s decision. a. Since the costs would be the same over the 4-year period, she will have made a good decision if the property value does not decrease. b. She made a fairly good decision. Buying the townhome will be cheaper over the 4-year period as long as she doesn’t have major repairs to make. c. She made a poor decision if the property value does not increase. Renting the townhome would be cheaper over the 4-year period. d. There is not enough information given to determine which option is best.
The Correct Answer and Explanation is:
Correct Answer: b. She made a fairly good decision. Buying the townhome will be cheaper over the 4-year period as long as she doesn’t have major repairs to make.
Explanation
Viola’s decision to buy rather than rent appears fairly sound, based on the limited information provided. The move-in costs for buying ($785) are actually lower than those for renting ($845), which is unusual but favorable for her situation. More importantly, she anticipates staying in the area for four years, which is a significant period in which to potentially build equity and benefit from homeownership.
Typically, buying a home is financially advantageous over the long term because mortgage payments contribute toward ownership of the property, unlike rent, which is a recurring cost without return. Even though Viola relocates often, her expectation to stay put for four years gives enough time for the benefits of buying to outweigh the costs associated with selling later, such as closing costs and realtor fees.
However, it’s essential to acknowledge the risks. Owning a home comes with responsibilities like property taxes, insurance, and maintenance or repair costs. If Viola encounters major repairs, this could erode the financial benefits of buying. Still, if she avoids significant unforeseen expenses and the market remains stable (even without significant appreciation), she is likely to come out ahead or at least break even compared to renting.
Option (a) is incorrect because it assumes cost equality over four years, which is unlikely unless detailed costs (mortgage payments, rent amounts, taxes, maintenance) are given. Option (c) wrongly assumes renting is cheaper if property value does not increase—it omits the equity and tax advantages of ownership. Option (d) claims insufficient information, but we can make a reasonable judgment based on the time horizon and move-in costs.
Thus, option (b) best reflects the situation: buying is likely cheaper over four years as long as major repairs are avoided.
