The Five-Year Rule for Home OwnershipPosted Saturday, April 27, 2013
When considering whether you should purchase a new home, you want to take into consideration the five-year rule. That’s the minimum number of years many experts believe you need to own a home in order to break even on it when you sell it. Some experts are now suggesting seven years, but in this article I’ll be talking about the five-year rule.
What happens if you own your home for less than five years? Often, you’ll lose money because:
- You pay thousands of dollars in closing costs each time you buy property. That money does not build equity or increase the value of your home in any way.
- In the first five years of your home loan, a much higher percentage of your monthly mortgage payment goes toward interest than toward paying down the principal of the loan balance.
How do you beat the five-year rule?
- Purchase a property you intend to fix up and rent it out at a rate equal to or higher than the mortgage payment.
- Buy towards the lower end of what you can afford, and make extra payments to pay down the principal.
Why own for five years minimum?
- After five years, due to the structure of amortized mortgages, the cost of owning a home equates to the cost of renting.
- The five-year mark is where you typically start to build equity in your home.
- Rental prices continue to rise; eventually your mortgage payment could be less than a rent payment.