Thanks to cable TV and a few select online personalities, you may think that the real estate game is best played fast and furious. In reality, for the vast majority of property owners, real estate is not a game at all and should be considered a long-term financial investment.
Of course, life doesn’t always support long-term stasis. Families grow or shrink. Career opportunities take us in unexpected directions. And needs change. But by and large, as much as you are able, there’s one rule in real estate you should always try to follow.
When you buy a home, be sure you’ll be happy with your purchase for at least five years. Otherwise, you’re probably going to take a financial hit. Here are two important reasons why.
You Have to Pay Closing Costs with Every Purchase
Every time you go through with a home transaction, no matter if you’re the buyer or seller, there are expenses. Many buyer costs are associated with the research of the property. You have to pay out of pocket for the home inspection, appraisal, and survey (if one is performed). You’re also responsible for the title insurance, recording fees for the deed, fees associated with getting the home loan (including origination), and the attorney fee for closing. You may also have to pay prorated property taxes, prorated homeowners association fees, and any recording fees to satisfy the deed of trust.
Then, when you sell the home, you have a new set of expenses. For one, you’re now responsible for covering the real estate commission of both the buyer’s agent and your listing agent. You are also responsible for certain attorney fees, including faxes, copies, courier, and the deed preparation.
In short, typical closing costs can easily add up to thousands of dollars. This easily affects your initial equity in the home and how much you’re able to profit in the sale. Limiting how often you have to pay that kind of money is always a good idea.
Most of Your Initial Mortgage Payments Go toward the Interest
Another hit to your wallet comes when you see exactly where your monthly payments are going. The way mortgages are structured, you pay much more interest in the first few years of ownership.
In an amortization schedule, each repayment installment (e.g. monthly mortgage bill) is divided into equal amounts and consists of both principal and interest. At the beginning of the schedule, a greater amount of the payment is applied to interest. With each subsequent payment, a larger percentage of that flat rate is applied to the principal.
Usually, it takes about five years of mortgage payments before you’ve made enough progress on the principal to make owning a better option than paying rent. If you’re not prepared to stick it out (or make substantial additional payments toward your principal), you’ll be giving a lot of money to the bank for no reason.
