Whether you are buying your first home or your 4th home, the time you spend in your home before downsizing or upgrading makes a financial difference in your investment. Most people start out in the real estate industry when they buy their first home. Unless they come from a very wealthy family or have won the lottery, the home is priced modestly or on the low end and is built that way as well – smaller square footage, less bedrooms and baths, in an up and coming neighborhood. First time home buyers can be single professionals who are successful, in a steady job, with an income that is rising each year, but most people who buy a home for the first time are couples looking to start a family. These couples eventually would like to move out and move up to provide more space for their growing family. They are “getting their foot in the door” with their first home to establish credit and create equity opportunity to eventually sell and move up to something bigger.
The biggest question then, to ask is this – how long do you stay in your home in order to make sure you aren’t losing money and to build enough equity to become a “move-up buyer?” The answer to this depends, but it is typically about 5 years. Below are the reasons for this number:
1. Closing Costs: Whether you are buying a new or previously owned home (resale) or refinancing your home, you are going to “run into” closing
costs. Closing costs is the profit for loan originators, title companies, and the state in which you live (recording fees) which are charged during the loan process. Every company needs to make money, and closing costs are how they make theirs. Closing costs are, most of the time, added to the principle of your home, increasing your loan amount and shrinking your home’s equity. Each time you make a real estate transaction, you are charged these costs. Staying in your home approximately 5 years “pays off” these closing costs enough for there to be enough equity in your home (most of the time) to have money for a down payment when you move to your next “move-up” home.
2. Interest: Even with the historically low interest rates in the market today, the mantra in real estate still stands, “The Bank Gets Paid First.” When you are paying your monthly loan payments, you will notice on your mortgage statement that the amount of principle being paid on your home is significantly less than the amount of interest being paid. You can also see this on your amortization schedule during your closing. As your loan “ages,” the amount of interest balances the amount of principle and eventually ends up being less than the amount of principle during the last years of your loan. If you only stay in your newly purchased home for a short period of time – say 3 years – the amount of principle you “pay off” will not be enough to merit a sale and move unless you are making extra principle payments each month. The recommended period of time to stay in your home, reduce the amount of interest charged, and pay off as much principle as you can in order to gain equity during a sale is 5 years.
3. New Vs. Used: The type of home you buy can also make a difference in how much time you spend in it before you upgrade to something bigger and better. If you are buying a new home, it really doesn’t make that big of a financial difference in the time you spend in the home because typically, in a new house, you don’t end up with much maintenance on the home until about 4 – 5 years in. On a previously-owned home, resale home purchase, however, there may be a significant amount of upgrade and upkeep that you will expend when you first move into the home. Depending on the age of the home and the last time it was renovated, big system items, such as hot water heaters, condensers, garbage disposals, ductwork, roofing, etc. could end up needing to be repaired or replaced. If you look at the amount of money you spent on renovating the home, the amount of interest you pay on your monthly mortgage payment, and the amount of closing costs you paid during the initial purchase; you may see that it would behoove you to stay in the house for about 5 years (or more) to get the equity out of the home to pay off your financial investment.
4. Appreciation: The “golden days” of “instant appreciation” are fewer and farther in between when it comes to purchasing your first home in an “up and coming” area. During the real estate boom of the early 2000’s, subdivisions were seeing appreciation in their homes from the beginning and build out of Phase I to the commencement of building Phase II. You have probably seen the prices on the signs change from Phase I to Phase II where the exact same floorplan started selling $10,000 – $20,000 higher in Phase II than it did in Phase I. Those days of instant appreciation are very rare, so when you purchase your home in an area you expect to experience residential and commercial growth, you, as a homeowner, may have to wait a little bit longer for that long-anticipated appreciation to come about. Along with the other factors mentioned above, this is yet another reason to wait approximately 5 years before selling and moving to a bigger and better home.
Ron Lee Homes, a home builder in St. Tammany Parish, specializes in 2nd home (and above) move-up homes. Whether you are looking to build a semi-custom or fully custom new home in Mandeville, Covington, Madisonville, or Abita Springs, Ron Lee Homes will work with you and provide base floorplan designs for your consideration. Buying or building a new home can seem a little challenging, but working with the team at Ron Lee Homes will make your home buying / building experience a pleasant and satisfactory process. To get started with the plans for the home of your dreams today, Contact Ron Lee Homes at 985-626-7619 or E-mail Info@RonLeeHomes.com.