The Five-Year Rule for Home Ownership

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:

1. 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.
2. 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?

1. Purchase a property you intend to fix up and rent it out at a rate equal to or higher than the mortgage payment.
2. 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?

1. After five years, due to the structure of amortized mortgages, the cost of owning a home equates to the cost of renting.
2. The five-year mark is where you typically start to build equity in your home.
3. Rental prices continue to rise; eventually your mortgage payment could be less than a rent payment.

Links:

Interest

http://www.investopedia.com/articles/pf/05/022405.asp

Amortized mortgages

http://www.mtgprofessor.com/A%20-%20Amortization/how_do_amortized_mortgages_work.htm

Rental prices

http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp