The Five Year Rule for Buying a House
THE FIVE YEAR RULE
The Upgrade Cycle
If you are making a little more money every year, you will be in a position to afford a bigger house in three years time. Everyone assumes that buying is more cost-effective than renting - as long as you're paying down the principal on your mortgage, you're going to come out ahead.
The Five Year Rule
The first hit is your closing costs. Everytime you close on a home - buying and selling - 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 when you look at your mortgage statement to see exactly where your monthly payments are going. The way mortgages are structured, you pay much more interest in the first few years. It isn't until you are about five years into paying down your mortgage that you've made enough progress on the principal to make it a better deal than paying rent each month.
When you take out a mortgage, you are paying an interest rate on what you owe. In the first year, when the principal is highest, the interest you need to pay is also the highest. However, since the monthly payment is the same throughout the term of the loan (with a fixed-rate mortgage), more of the payment will be used to cover the interest payments, meaning less is going towards the principal. As your principal goes down, your interest payments will go down, leaving more of your check to go towards the principal.
You may also consider buying a house that you won't stay in for five years but that you also won't turn around and sell. It is not out of the question to purchase a house, start paying it down and fix it up so that you can turn around and rent it out. You need to be careful that you're choosing a house that you can afford in addition to a mortgage for your next home, even if you can't find a renter. Be sure to study up on real estate before making such a choice.
This number could come out negative or positive. If it is lower than the rent you would have paid during the same time frame, then you would be better off buying. If the number is higher, meaning the selling price wasn't high enough to cover all costs, then renting would be the more cost-effective choice.
Information taken from article entitled 'The Five Year Rule for Buying a House' on Moneyning.com at: http://moneyning.com/housing/the-five-year-rule-for-buying-a-house/
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