Follow the Five Year Rule to Avoid Wasting Money on Your Home
Most homes are expensive, so if you want to buy you have to be smart. And generally, the longer you plan to own a home, the better. Personal finance blog MoneyNing explains why while offering the “five-year rule.”
Despite the standard 30-year mortgage, most people have not lived in their homes for thirty years. You usually move much earlier, but if you’ve only lived in your home for a few years, you may end up losing money on it. MoneyNing explains:
When buying a home, you need to be sure that you will be in the same location for at least five years. Otherwise, you are likely to take a financial hit.
The first hit is your cost of closing the deal. Every time you close – buy and sell – money falls onto the table. Depending on where your home is, buyers and sellers pay different amounts, but each pays something. This can easily add up to thousands of dollars, and limiting how often you have to pay that kind of money is always a good idea.
And you get a second hit when you look at your mortgage statement to see exactly where your monthly payments are going. The mortgage structure suggests that you pay much more interest in the first few years of owning a home. It is usually only five years after the mortgage is paid that you have made enough progress on the principal to make it more profitable than the monthly rent.
Depending on where you live and the details of buying a home, your mileage will vary, but this is true. This calculator will help you calculate how long you need to live in a home to get better than the rent. And flipping a house is a different story altogether, because you put tens of thousands of dollars in cash into a house to dramatically increase its value and (ideally) sell it for much more than you paid.
Again, mileage may vary slightly, but overall this is a good rule of thumb to follow for first-time home buyers. Check out the full post for more information.