Many homeowners go through the same type of upcycle, which goes something like this:
They buy their first home, which is often either a townhouse/condo, or a small home. After about three years or so, they start to look for an upgrade, to either a bigger townhouse, or into a larger family home.
This cycle repeats itself, until these homeowners work their way up to a house that they fall in love with, which is large enough for their entire family.
We all know – or assume – that buying a house is more cost-effective than renting. So long as you pay your principal on your mortgage, you’ll likely come out ahead. But if you continue on this cycle every three years, like many other homeowners throughout the Worcester and Blackstone Valley region, then you may actually lose money.
Understanding the 5-year-rule of homeownership
The five-year-rule states that you typically want to stay in your same home for at least five years, otherwise you’ll likely take a hit, financially.
The first hit you’ll face is your closing costs. Every time you go through closing — buying and selling — money hits the table.
This can easily add up to thousands of dollars. Limiting how often you pay that kind of money is always a good idea.
The second hit comes when you glance 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 you own a house.
Usually, it isn’t until you’re 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.
But there are ways around this 5-year-rule
Even though it’s called the “5-year-rule,” this rule isn’t set in stone. In fact, there are ways you can upgrade into a new, and bigger home, without losing money.
The biggest factor is about how much you’re going to pay on your mortgage. What we often see is clients looking to buy as much house as they can afford, based on what the lenders offer them.
But that’s typically at the absolute peak of what you can manage, financially. If, however, you buy a home at the lower end of what you can afford, and then make extra payments, you can pay off a bigger chunk of the principal.
Another option is to buy a house you know you won’t stay in for five years – but also one you know you’re not going to sell. In other words, you could buy a house, start paying it down, and then turn around to rent it out.
The caveat we have here is that you’ll want to make sure you buy a house you can afford in addition to a mortgage for your next home – even if you can’t find a renter. We’d strongly recommend you contact one of our real estate experts before pursuing this route.