You have just purchased a home that cost $250 thousand.The nominal mortgage interest rate is 8% per annum,mortgage interest payments are tax deductible,and you are in a 30% tax bracket.The expected inflation rate is 4%.Maintenance and other expenses are 8% of the initial value of the house.What is the real user cost of your house?
A)$20 thousand
B)$24 thousand
C)$27 thousand
D)$30 thousand

Question

Quizplus · Accepted Answer

Real user cost = [(Nominal mortgage interest rate - inflation rate) x initial mortgage balance] + maintenance expenses - (tax savings on mortgage interest payments)

= [(8% - 4%) x $250,000] + (8% x $250,000) - (0.3 x 0.08 x $250,000)

= ($10,000) + ($20,000) - ($6,000)

= $24,000

Therefore, the real user cost of the house is $24 thousand.

You Have Just Purchased a Home That Cost $250 Thousand