Owning a home means staying put for 5 years
Millennials could be missing out on a lot by choosing to rent as opposed to buying homes, according to financial author David Bach. His study found that homeowners are 38% wealthier than renters. Buying a home is more expensive than renting and requires more responsibility; however, unlike renting, when you buy you are making an investment.
Like any good investment, buying and selling homes requires patience. The median age for first time home buyers is 32. If first time homeowners are patient and live in each of the homes that they buy in their lifetime for a minimum of 5 years, by the time they are 50-60 they can sell their home and use the money they make to retire. The following is a list of things to consider when buying a home, and reasons to remain in your homes for at least 5 years.
Know Your Budget
The median income for first home buyers is 72,000. If this income seems high, consider a studio or smaller home to lower the cost. The bank will loan you the maximum that they think you can afford. Consider borrowing 10-15% less than the bank will lend you, this will make your monthly payments more affordable and your debt more manageable.
If you can save at least 10% as a down payment, you will considerably lower your mortgage payments. The more money you have as a down payment, the lower your loan rate will be. An appropriate down payment will allow you to secure an affordable monthly payment.
The Five-Year Rule
Many homeowners stick to the five-year rule, according to Scott Durkin, chief operating officer at Douglas Elliman Real Estate. The best you can hope for after one year is breaking even, but more often than not homeowners take a loss. Beyond two years, homeowners are no longer subject to capital gains tax; however, five years allows them to build more equity.
The general principle of the five-year rule is waiting for the market to appreciate to double digits, in the hopes that when it does, the buyer can recuperate some of the purchasing costs. If the market doesn’t appreciate after five years, at least you have built enough equity to sell your home and make some money.
After what feels like a lifetime of sticking to the five-year rule, you will be ready to sell for the last time and begin to plan your retirement. If you are living in your forever home and over the age of 62 you qualify for a reverse mortgage. A reverse mortgage is exactly as it sounds, the payments work in the opposite direction of a conventional, forward mortgage. Essentially, you sell your equity to keep your home, and receive payments from the lender instead of making mortgage payments. As you receive payments your equity declines, but you can keep your home for the rest of your life. The reverse mortgage will be paid when the house is eventually sold; however, the borrower (the person paying a reverse mortgage) can only gain or break even from the sale because the amount owed cannot exceed the value of the home.
Reverse mortgages aren’t for everyone. They can be great for some and very risky for others, so we recommend doing your research and talking with a financial planner before taking a reverse mortgage.
Whenever you buy a home, consider living in it for at least five years in order to build equity and avoid losing money when you choose to move. If you live in each home long enough, you will be able to qualify for a reverse mortgage or even sell your last home and make enough money to retire.