Thinking of selling your house? Has it been under five years since you bought it? You might want to slow it down (unless you're swimming in equity from a crazy smart purchase you made at the perfect time or have a flip you're ready to unleash, of course). Same goes for those who are getting ready to buy - especially for the first time.
It's the five-year rule, and it's touted by experts as an important real estate guideline to follow if you want to make a smart decision that meets your financial and lifestyle needs.
"When you purchase a house, the general rule is that you want to be sure you'll be in the same location for at least five years. Otherwise, you're probably going to take a hit financially," said Money Ning.
"The first hit is your closing costs. Every time you go through closing - buying and selling - money hits the table. Depending on where your house happens to be, the buyers and sellers pay different amounts, but everyone 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."
The second hit is in the interest/equity balance. "When you take out a 30-year mortgage, the vast majority of your monthly mortgage payment is going to go toward interest charges for the first few years of the loan," said Mortgage Loan. "The portion of your mortgage payment that goes toward interest is shrinking all the time, and the five-year point is typically where you begin to get some real traction in building equity, which makes your interest payments fall even faster.
So the five-year mark is generally considered the point where your accumulated equity begins to exceed what you might have saved by renting, though it may vary depending on the terms of your loan and the cost of renting vs. buying in your area."
It makes sense. But it also goes against many people's real estate human nature.
We aren't necessarily conditioned to buy a home with an expiration date in mind. Yes, there's the buyer who's already got his eye on the move-up prize with a two-year max when he's buying his first home (and many of us have been that guy, and many of us have watched that two years turn into four or six when market conditions didn't cooperate or life changes got in the way). But real estate is a largely emotional purchase, especially for first-time buyers. What we want today may not be practical a few years out, but thinking about future needs can be tough when we're seduced by gleaming floors and a wood-burning fireplace. We don't always put a "sell date" on the home we're buying. But should we?
Well, yes, if the goal is:
- making a smart purchase that has the best chance of paying off financially
- creating a long-term family plan
- creating a comprehensive savings plan if you are looking to move up
- developing a clearer vision on how to treat home repairs, updates and upgrades so you spend smart
When it comes to fixing up your house, you'll want to do a cost-benefit analysis. "Think about what you, the current homeowner, want from your home," said US News. "Homeowners can get a lot of value out of renovations before they even put the home on the market. "If you have a dated kitchen or the stove doesn't work, you can invest money now to glean some enjoyment as well as make the home more appealing when you sell it."
If you know you're going to live in the house for five years, you may opt to upgrade an older, marginally functional air conditioning unit when you move in, and not when you're getting ready to sell, so you can enjoy it during your time in the house. Ditto those crusty old kitchen appliances.
But you might not rip up your entire kitchen to the tune of 50k or renovate your attic for your seven-year-old twins who "will need the space some day." When they're 12 and you move on to your bigger house at the end of your five-year plan, you'll be happy you didn't spend $100,000 to add a tween wing.