Prudent Homebuyers Follow The Five-Year Rule

When it comes to buying a home, there are many considerations up front: Which neighborhood should you choose? How much can you afford? What type of mortgage will be best? However, it is also important to think about the long-game. Specifically, it will be financially prudent to think beforehand about how long you plan to stay in the home before selling. This is where the “Five-Year Rule” comes in.

The Five-Year Rule is a relatively simple concept: stay in a home for at least five years prior to selling in order to protect your investment. Real estate and home finance professionals recommend following this guidance due to the way most mortgages are structured. Typically, a homeowner’s monthly mortgage payment will go largely toward interest during the first five years of the loan. Gradually, the balance tips and more of the monthly payment will go toward the principle balance owed on the home.

If you sell before the five-year mark, chances are good that you will actually lose money on the transaction, even if you get fair market value for the home. If you wait longer than five years, it’s likely that you’ve paid enough on the principle to have some real equity in the home, making selling a safer option for your finances.

Of course, it can be difficult to predict the future, and you may be wondering how to avoid losing money on a sale if you need to move before you’ve built equity. Savvy homeowners who want to hedge their bets can make additional principle-only payments each month to build equity more quickly. This typically requires a conversation with the mortgage lender to ensure the extra payment is not applied to interest, but it’s a simple process to set up and will accomplish the goal of building equity at a much faster rate.

If you’re unsure about committing to five years in a home, it may not be the right time to buy. Consider your options carefully in order to protect your finances over the long-term.

Image via Flickr/tracyseeger