So you've saved up enough for a down payment and have begun browsing real estate listings to purchase your first home. If you're considering buying a starter home and quickly moving on to something bigger and better, you might want to keep in mind the five-year rule.
It's widely recommended among real estate agents, investors, and other housing industry analysts that you should only buy a home if you plan to live there for at least the next five years. And while we don't have a crystal ball with every answer, we can offer some helpful tips for what to account for over those five years if you're thinking of buying a new home.
Let's examine what the five-year rule is, why it matters, and how to build a solid five-year plan for your starter home.
What's the 5-year rule?
You might be wondering why this five-year rule exists.
It's mostly financial, as moving to another house in less than five years will generally cost you more.
For starters, your mortgage payments for the first couple of years will mostly go toward paying down interest. It's not until around five years that your mortgage payments begin paying down the principal and you start building real equity. This is the point where your equity would offset what you might have saved by renting.
Secondly, selling your home so soon might mean you have to pay closing costs again. Depending on where you are at with the term, you can potentially be saddled with thousands of dollars in closing costs.
What to account for in the next 5 years
As we all know, it can be extremely difficult to speculate on what the next five years will bring us. However, there are a couple of things you can ask yourself to get a better idea:
- Are you going to change jobs?
- If you plan on transitioning into a new role or to a different company, this could necessitate having to move to be closer to your new job.
- Are you going to go back to school?
- Many people opt to return to school as mature students in their 30s and 40s. Whether it's to pursue a higher degree or begin a new educational journey, going back to school will be costly. You might also need to cut back hours at work to dedicate more time to your studies. In turn, this could put a strain on your budget and put you in a position to miss a mortgage payment.
These represent just a few of the variables that you should factor into your decision-making process when considering purchasing a new home.
Reach out to The Federal Savings Bank to learn more about building a five-year plan and buying your first home.