Cars & Houses
With a traditional 30 year mortgage you pay down about 3.8% of the amount borrow in 1st 3 years, and about 6.8% of that amount in the 1st 5 years. When you sell your house you typically pay for the realtor fees for yourself and the buyer (if using a relator). This fee is typically 4-6% of the sale price, on top of any concessions you might have to offer as the seller. So you can see why the general rule of thumb is you should plan to be in your home for about 3-5 years to buy the house because the amount of debt you pay down can go to realtors’ fees when its time to sell.
This is NOT saying don’t use a realtor, I’m a firm believer that having someone that is knowledgeable help you through a big, complex transaction is invaluable. They usually provide more value than they cost. It IS saying buying a house that you only plan to be in for 2 years and then sell MIGHT not be the best idea.
NOW, general rules of thumb can really get you in trouble if you’re not careful. BUT, they can give you a good baseline before taking into consideration your specific satiation. There are big benefits to owning your own. You might be able to deduct the interest you pay on your taxes and you can use your monthly housing costs to help create equity for yourself by paying down a mortgage. Maybe yo can make some improvements to the house which will help increase the value before you sell.
With that same 30 year mortgage, if you stay in the house for 10 years, you’ll pay down 16% of the amount you borrow, and after 15 years that goes up to 28.5% of principal paid down. WHOA!
Homeownership ALSO means that you’re responsible for things like a new roof, a new hot water heater, landscaping, fixing the toilet, new paint, and upgrades. These costs are on TOP of the mortgage payment you have and tend to big larger expenses at random times. If you rent, you’re not building equity in anything, but your costs are fixed. Someone else fixes the toilet and deals with those other pesky problems that come up.
I own my house and I’m ready to buy a new house. Should I keep my current house or sell it?
This is a question I get a lot. And the answer is, it depends. Now David, that’s not helpful! I get it, but it really does depend on your specific situation. What I can give you is some things to think about when you’re making this decision.
The first question is, will keeping the existing house help or hinder you from moving into the new house? You’re obviously moving for a reason. Does the mortgage on the existing house create issues in qualifying for a new mortgage? Do you need to access the equity in the first house in order to buy the second house? If the answer to these is no, then you can move on to the next question!
Next thing to ask yourself is, can I charge enough rent in order to cover all of my costs and either generate additional cash flow on top of that or pay down debt to create equity? Do I think the property will continue to go up in value? If the answer to these is yes, keeping the house is starting to look pretty good! A couple of notes on cost that you need to think about. Will you be the property manager or will you hire someone else to do this? This is a cost, whether it’s your time, or an actual cost, it costs you something. Have you taken into consideration long term costs? Think replacing that hot water heater, new roof, and making general improvements between tenants like painting.
A couple other things to think about before making the decision. Have you ever heard about the primary residence exclusion for capital gains taxes? Keep in mind when you sell most anything for a gain, the IRS is usually going to make you pay capital gains taxes. One exception to this is when you sell your primary residence (where you live and report on your taxes). If the house you are selling has been your primary residence for any 2 out fo the last 5 years, the IRS will allow some of those gains to be taxed at my favorites tax rate 0%. If you’re single, the first $250,000 in gains is tax-free. If you’re married the first $500,000 in gains is tax-free. So if you want to give renting a try, you have a couple of years to see if you REALLY want to do it long term before missing out on that tax benefit.
This is not intended to be a comprehensive list of everything you need to consider, but should give you a good start!
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.