The Five Year Rule for Buying a House

by Thursday Bram · 375 comments

Handing over the keys when buying a house
My entire family got involved when I first considered buying a house, since I have the luck of being related to real estate agents, investors, and other experts that are more than happy to give advice about buying a property — even before I ask.

The first thing they asked me was exactly how long I expected to stay in the house. Though I didn’t know the exact amount of time, they wanted to make sure that I’d own the house for at least five years.

Why’s that? What’s the five year rule for buying a house? 

The Upgrade Cycle

It definitely varies by geographic area — if not by specific neighborhood — but a lot of folks near me will buy a townhouse or condo as their starter home. After about three years, they’ll start looking for a bigger place to upgrade to, either a bigger townhouse or a single family home. This upgrade cycle will repeat itself a few times, as people work their way up to a house that they are happy with and that is big enough for their family.

The thought seems to be that if you’re making a little more money every year, you’ll be in a position to afford a bigger house in three years time. And everyone knows assumes that buying is more cost-effective than renting — as long as you’re paying down the principal on your mortgage, you’re going to come out ahead.

But with an upgrade cycle of about three years, there’s a good chance that you will lose money.

The Five Year Rule

When you purchase a house, the general rule is that you want to be sure you’ll be in the same location for at least five years. Otherwise, you’re probably going to take a hit financially.

The first hit is your closing costs. Every time you go through closing — buying and selling — money hits the table. Depending on where your house happens to be, the buyers and sellers pay different amounts, but everyone pays something. This can easily add up to thousands of dollars, and limiting how often you have to pay that kind of money is always a good idea.

And you take a second hit when you look 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.

David’s Note: When you take out a mortgage, you are paying an interest rate on what you owe. So, in the first year, when the principal is highest, the interest you need to pay is also the highest. However, since the monthly payment is the same throughout the term of the loan (at least with a fixed rate mortgage), more of the payment will be used to cover the interest payments, meaning less is going towards the principal. As your principal goes down, your interest payments will go down, leaving more of your check to go towards the principal.

If you can wait at least five years to move, you’re in a better position to be ahead of the game.

Defeating the Five Year Rule

Five years is a generality. If you add in a couple of other factors, you can make buying a house that you don’t plan to stay in long-term a better choice.

The biggest factor is how much you’re going to pay on your mortgage. A lot of people buy as much house as they can afford, according to what lenders offer them. That’s usually the upper end of what you can financially manage. If, however, you buy at the lower end of what you can afford and make extra payments, you can pay off a bigger chunk of the principal. You need to run the numbers for the specific house you’ve got your eye on, but you can often come out ahead.

You may also consider buying a house you won’t stay in for five years — but that you also won’t turn around and sell. It’s not out of the question to purchase a house, start paying it down, and fix it up so that you can turn rent it out. You do need to be careful to choose a house you can afford in addition to a mortgage for your next home, even if you can’t find a renter. There are plenty of other arrangements that can work out similarly, but you need to study up on real estate before making such a choice.

[Click here for a discussion on whether you should buy an investment property.]

Bottom line: if you know you’re going to buy a house based on what the bank says you can afford, and you don’t want to think about renting it out, don’t purchase a house until you’re ready to spend at least five years in it.

David’s Note: Here’s a quick and dirty formula you can use to help you figure out whether it’s better to buy or rent, which works with any duration of ownership. Try to calculate: Seller and Buyer Agent Fees When You Sell + Purchase Price + Maintenance Cost for the Time of Occupancy + Interest Paid on Mortgage + Investment Gains from Your Down Payment + Taxes Paid (Such as Property Tax) + Closing Costs – Selling Price. This number could come out negative or positive, but if it’s lower than the rent you would have paid during the same time frame, then you would be better off buying. If the number is higher, meaning that the selling price wasn’t high enough to cover all those costs, then renting would be the more cost-effective choice.

And If You Do Need to Sell, Here are 5 Tips to Sell Your Home Faster

One of the realities I had to face when I recently moved across the country was that I needed to sell my home fast. I ended up listing with a relatively new real estate agent who could help me immediately find someone to buy the house. Our family was also willing to take a loss on the home, and pay out of pocket to make the deal go through if necessary. In the end, we sold the house in less than a week without it ever being officially listed.

If you want to sell your house fast, there are a few other things you can do to improve the chances of selling your house faster. Here is what Bennie D. Waller, a Professor of Finance & Real Estate at Longwood University, suggests when it comes to selling your home fast:

Start with an Appraisal

Waller suggests that you begin with an appraisal for your property. That way, you have a better idea of what your home is really worth. Too often, we attach higher value to the home due to sentiment. An appraisal ahead of time can help you see what your home is likely to fetch on the market.

Price Below Market Value

Your next step is to price your home below market value. If you want to sell your home fast, you need to offer an attractive deal. It might not be what you want to do, but if you sell for less than you owe, you can move the home off the market much faster.

De-Clutter Your Property

Make sure that you present your home in its best light. “Put pets in kennels. Rent a storage unit if there is excessive clutter,” says Waller. That way, you will be able to show your home when it’s most attractive. Curb appeal goes a long way toward helping you sell your home a little bit faster. If you fix cosmetic issues to make your home more attractive, you will have better luck selling your home fast.

Attract an Experienced Broker and Motivate Him or Her

Waller suggests that you attract brokers willing to list your property by offering better commissions. “For example, offer 8% commission,” he says. “Give 3% to the listing broker and 5% to the selling broker. This will generate traffic from your listing agent as well as cooperating agents.”

He also suggests hiring someone experienced as well. However, he says that you should avoid a broker that is marketing his or her own property, or has a lot of listings similar to yours. “I have a research paper that shows that agents marketing their own properties displace efforts.” Make sure that your listing is going to have priority if you want your home to sell fast.

The truth is that selling your home fast is likely to be an expensive experience. You will probably have to do a little more, and pay extra for the convenience of a fast sale. If you can swing that, or if you know you need to move, then it might be worth the cost.

five-year rule

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{ read the comments below or add one }

  • Shlomo says:

    Funny typo:

    As your principle goes down, your interests payments will go down, leaving more of your check to go towards the principal.

    Does your principle go down or your principal?
    Maybe both or maybe you have no principles…?

  • Karen says:

    We scrimped and saved and then bought a modest house without a mortgage. No worries about getting underwater! No concerns when my hubby lost his job. All we have to worry about is coming up with the taxes (no small matter in my town). It is a great feeling!

  • john says:

    Interesting. It just shows that most of you dont know much about housing markets, and more importantly, what a house is worth. No time to tell you how you work it out now, but I have been in real estate for over 50 years. I’ve got every top and every bottom of the real estates markets in every country I follow (half a dozen) for the past forty years. It’s easy.
    It doesn’t always pay to buy a house, and the time at which you buy makes all the difference. You make your profit by buying well.
    Some of you should look at the chart of house prices in the US for the hundred years up to 2010. It says it all. Anyone buying during the lift-off period was asking for trouble. You buy cheap and sell dear. If you buy at the top of a helter-skelter you sure are going to get a fast ride down.
    I have written books on how things work, and how to value a house. And I run the world’s longest-running real estate website. Maybe you should check out some of my writings at The Unique Property Site. I’m easy to find as Google ranks me Number One.

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  • Ronson says:

    Amazing how this common sense talk is passed off as being either useful or even right. In case anyone here has a basic understanding of math or economics, there is no 5 year rule, the “principal” amount of the mortgage does not effect the investment value of the transaction, and for most of the last 60 years, real estate is a very poor investment.
    In fact, there is little or no financial reason to own a house. Much of the nonsense spewed above speaks to a forced saving plan and speculation. The bottom line is to access the investment value of a house / condo one does one thing – look at the total cost of ownership minus rent = investment value. Now if you can rent for 1200, and it costs (including all utilities, mortgage, taxes, amortized transaction costs and maintanence) 2400 to own, you could be saving 1200 per month. Put that in an investment that earns 5% and now you can see where you are in 5 years.
    The property might go up …. might go down. Renting you would have saved …. 14,400 per year plus compounded interest …. 60 – 70k. Now there are some risks to renting, the landlord makes you move, increases the rent, whatever …
    Historically residential real estate generates a lower return than risk free investments (bonds), this is made up of large speculative swing and huge corrections, fed by banking malfeasance and bad monetary policy.
    Having a home does have benefits like choice, upgrades, security, etc …. but as an investment vehicle it is a bust, and has been since 1929. If people stopped being conned by realtors and bankers into paying way to much for housing, we would all be alot happier, economically more sound and happier.

  • sandman says:

    All money discussions aside, I think most people fail to think about the things that don’t necessarily have a monetary value in a house but do cost you. Time is money and more than likely you are going to spend a lot more time working on a house than renting. Let’s put it simply, if you are going to pay the same amount on rent as a mortgage, the house actually costs a lot more due to all the listed items people have stated (insurance, etc) but more importantly the fact that you have all the upkeep, mowing lawns if you have one, fix it work, etc etc. These all take time out of your daily life. If you don’t have time or it takes away from your income than what is the point of owning a home?? I am a young adult (28) who does not own yet, but I do not look at the housing market as what most everyone 10-20 older than me do. A house is no longer a money making venture or investment, it should be though of as your place to live, not something to flip in 5 years and hope you come out on top by a few grand while you put your life into that place. The time and effort that you put into a house has to be factored in as well, and that factor has different values for different folks. I personally am going for the easier approach of saving up more now and then putting down a lot more later. It is a lot easier to do that while in my busy lifestyle now of full time job, working on a masters, etc than to try and deal with a house just to use up all of my free time on the house and only save a couple grand if you are lucky.

  • Maxipooh says:

    My landlord once told me my rent is paying her mortgage. Why not use my rent to pay MY mortgage? Now is an excellent time to buy. I’d rather own my own home and suffer the costs than continue to be attached to people who make noise ALL night long and have no respect for boundaries. I know I have my situation and everyone else has theirs. The bottom line is, it’s a matter of personal choice and what one is willing and able to do. I respect everyone’s viewpoint on the issue and whatever you decide I wish you the best!

    BTW……..house hunting sucks!!!!!!!

  • Scott says:

    Yep back to the whole argument of Rent or own? I rented for many years. Blowing about $8,500 on rent a year. Now I completely understand there are some expenses with owning a home and you will eventually blow money there too. BUT in the long run renting is a “for sure” loss of money each year. Owning at least you give yourself a chance to build some equity, sell higher, etc. I get it..closing cost, moving expenses, upgrades will all cost you. But the housing market will come back, maybe not blazing hot, but %3-%5 percent a year and rent will continue to go up!

  • yvonne says:

    To get your own house or a Rented house ?
    i think its a good place to start on financial, its all about lifestyle…
    Start investing…

  • AJ says:

    This has been article has come with interesting comments. Obviously, there are people that really, really like owning a home and others that really, really don’t want to own a home. For those people, the choices are clear and should be respected. For those on the fence, this Bankrate “Is renting or buying for you?” wizard may be a good place to start. It’s more than financial, it’s about lifestyle, too.

    http://www.bankrate.com/calculators/mortgages/rent-or-buy-home.aspx

  • Rachel says:

    Buying in this market/economy can be a smart move if you’re honest and responsible with yourself. I was able to buy a modest (foreclosed) 2 bedroom condo for the same monthly amount I was paying to rent a 1 bedroom apartment. I now get the tax write off for the interest, whereas I was just tossing money away for an apartment. Also, in 5-6 years, when I am ready to buy a house, I’ll be able to rent my condo out at a very competitive price with apartment complexes in my area. Since social security and my 401k probably won’t exist when I am ready to retire and my condo will be paid off by retirement age – my condo is my new retirement plan.

  • Gary says:

    My wife and I bought a home in NC in 2008 with the intent of staying three years and then selling…military family. Recession hits…prices drop, and we changed our plans. After receiving orders to move overseas in 2011, we rented our home to another military family. Rental income was below our mortgage to the tune of about $200 per month out of pocket (after paying the property manager, to keep the house. Our plan currently is to either hold the house until prices rebound enough to break even or we pay down the mortgage to balance the loss of value in the home.

    In your opinion is it sound to approach the situation in this manner. We have saved about (6) months of mortgage payments in the event that we lose the current tenants unexpectedly, but I am fairly confident they will be there at least (2) more years.

  • Tanya says:

    I bet if you ask your landlord if it’s better to buy or rent he’ll tell you keep on renting. You are paying his or her mortgage in the end! Somebodys got to buy the house for you to rent it. People forget that little detail.

    • TA says:

      well, so ?. why should we take the stress, mobility problems, mortgage issues etc.. ?. Since the landlord wants to be a big owner, let him take up all this headache. ?

      if you rent good & rent cheap, it will payoff in the long run !!. And if one is single, then they can share accomodation & pay just 20/30% of the rental. !!

  • Paxton Addleman says:

    I’m pretty tired of authors who claim to be professionals but who don’t bother with basic proofreading or editing.

    When a person is the object, the pronoun is “who”, not “that”: “…real estate agents, investors and other experts **WHO** are more than happy to give advice…”

  • Tanya says:

    I’m trying to figure some things out. If your house value goes down but you want to buy a bigger house won’t the larger houses value be down also? You could get a better house for less right? If you buy a house and sell it for less than you paid will you still be in a better place than a renter who’s rent money went to their landlords pocket anyway? If you live in a bought house for a couple of years and lose money wouldn’t it still cost less than paying rent over the same amount of time?

    • TA says:

      Tanya, not necessarily. It depends on where you buy, for eg, if you sell in a location where prices are goind down faster than the location where you intend to buy – you lose on both sides !! – double whammy !. On the buy v/s rental, you always have to look at all the pros & cons. for eg, when you buy, you lose mobility, you end up continuing in mediocre jobs & when you move to another Job within the city, you will end up travelling long distances to & fro piling up huge travels bills, etc.. + mortgage problems, stress, forced to live frugally when you have a big mortgage hanging above your head, lost vacations, dinner outs etc..

      It is always better to

  • Phil says:

    More B_LLSH_T from a supposed expert! REMEMBER balnket statements never cover anything!
    #1 in TODAYS market sellers are paying a significant chunk of closing costs and realtors fees.
    #2 The fact that most of your payment in the early years goes to interest can be a good thing. INTEREST IS DEDUCTABLE. So if your payment approximate your rent you gain tax benefits by making a house payment. PLUS your mortgage interest is usualy the thing that allows the average person to itemize deductions and take advantage of other deductile items.

  • david burns says:

    Closing costs are interesting. They are basically a bogus tax added by the bank. If you go down the list of ‘closing costs’ and research them a little ( or ask specific questions to your mortgage banker) they will have a difficult time explaining them. In addition, the last several houses I have sold – I am the one who has had to pay closing costs. What used to never occur is now common – the buyer claims to be broke so the mortgage company says “seller, how bad do you really want to sell this house? Okay then, fork over closing costs for the buyer so we can proceed.”

  • Aryn Kerr says:

    …and the biggest thing missing from your equation is on the backside of the owning the home for short durations is the 6% in realtor fees you will pay when you sell. So you purchase a 200,000 home, with at least 10,000 in downpayment and closing fees, pay for maintenence/upgrades (granted they do improve quality of life), pay almost entirely interest in the first 5 years, and then sell the home @ lets say 210,000 with another 12,000 going out in closing cost. Owning a home is very expensive…renting can be a better tool for short term savings as a tool for long term savings. But, owning a home gives you and your family the freedom to enjoy the space as you wish, and that def. has its own value.
    I have always been schooled under the idea of own a home if you can, why ‘throw’ money away towards rent, as long as you stay within your means. However, after facing recent layoffs and the potential for relocation (no help from most companies in todays world) I will lose 8 to 15 thousand dollars on a home owned for 3 years. This includes closing costs upfront, completing landscaping in backyard (all construction completed by myself) and facing 12,000 in selling costs. Will most likely keep as a rental and look at building a rental portfolio as another long term investment/retirement plan.

    • Aryn Kerr says:

      …..12,000 going to to REALTOR fees, not closing costs, oops

      • Diana says:

        I just avoided using a realtor. I had one for my first home buying foray (which ended in disaster when the homeowner left the heat off and the pipes burst, ruining the kitchen, which they were unwilling to fix). When I was looking the second time around I called her up and said “what do you do for me I can’t do myself or have a lawyer do?” The short answer was nothing. If you don’t mind doing research, making phone calls and doing your own leg work in general you don’t need a realtor to buy. The seller didn’t use one either. It cut costs down greatly on the price of the home to not have to consider that 6% and eliminated dealing with each other (and lawyers) through middle-men.

  • Dan August says:

    I guess I just don’t understand some people’s definition of “mobility”. When you look for a house, there is a lot of research that goes into the search. Crime rates, schools (if you have kids) taxes etc. The idea is when you buy, you plan on staying for a few years. If you are buying a home, you shouldn’t go into it thinking you’ll be able to sell six months from now. If that is you reasoning, then you should never buy. Most people who buy for reasons other than investing tend to stay more than 5 years. There are obviously parts of the country where jobs are scarce, and people need to be able to move on a moments notice to areas where there are jobs. But for most, if you are thinking of buying, in addition to the other facts previously stated, you should be researching the job market in the area you are already in, to make sure jobs aren’t going to completely dry up during a downturn.

    If you have kids, having your kids go through the same school system is defintely going to benefit them more than switching schools every 2-3 years. I know this because I was one of those kids that moved every year. Between 1970-1974 I moved 5 times. The town of the last move I consider my hometown, because I lived there 30 years. If you find the need to move every 3 years, then it sounds like there isn’t much thought being put into the moves.

    Finding cheap rent most likely means you have to live in an area you don’t want to live in, which facilitates wanting to move ever 2 -3 years. Being transient also doesn’t look that great on job resume.

    • Diana says:

      Totally agree. Great points. I think people also fail to consider that a home is an asset you can sell when you’re older. Even if it has decreased in value, you will get SOMETHING for it. You get nothing for those years of rent.

  • aryton senna says:

    Well, perhaps the math may help:

    My first house in San Diego was financed VA, so no money down – netted $85,500. in 5 years; next in Dallas netted $475,000. in 25 years with no mortgage 1991 -> 2004; paid cash for a 2000 ft sq place here and netted $86,000. in 26 months.

    Rolled all and paid cash for my 6500 ft sq retirement digs here in August 2005.

    Obviously, I was at many right places at the right points in time.

    ret expat MD

  • Darren M says:

    For those who think renting is a better option than buying, you maight want to read this article on CNN Money http://money.cnn.com/2012/04/05/real_estate/buy-rent-home-prices/index.htm?iid=HP_LN

    Basically, it goes on to say that since the housing bust, many people have either sold their house to get out ofrom under it or walked away, and these paoeple have to live somewhere. The amountof people looking to rent has raised the cost of renting. We’re seeing the opposite of what happened in the housing market. Demand for properties and liberal loan practices drove up the price of homes. Now we are seeing the price of rents rise based on demand by those who previously owned houses. so at the end of the day, you could still be paying a rediculous amount of rent and getting nothing in return; no equity, no tax deduction. In my book, owning is still better than renting. As someone previously said, you buy a new car and it starts to depreciate as soon as you drive it off the lot, but you keep paying anyway.

    • JK says:

      First off, lets be clear. Renting is a cost of living as much as food & water. So the renting cost is not a waste. It simply does not make sense to go & buy a massive mortgage + maintenance + property tax + lost mobility/ opportunities – cannot move to another city/higher paying job etc.. + if disaster strikes then your so called house assets will go up along with the tornado ) just to save on the rental and for some silly emotional security. Rent cheap (as much as possible), earn, save, invest & retire in Bahamas or wherever! Who cares! This is basic survival, the rich can own all the houses for what ever it is worth.

      • JK says:

        Plus the stress of paying mortgage for 30 yrs + sucking up to your boss since now you need the job more than others +not going for a risky but high paying job + not venturing out to start your own business + wow – I can go on forever here !! – so anyways you know buying a house never ever makes sense !!

        • Diana says:

          You still have to maintain employment even if you rent, so you’re still “kissing up to a boss.” Also if you buy a reasonable house (affordable, updated, not oversized) you aren’t saddled with a ridiculous mortgage, taxes and loads of upkeep/utilities. People can’t afford to buy, or feel saddled with huge debt once they do, because they want (not need) a house much bigger, fancier and in a better area than they usually can reasonably afford. People also become accustomed to included utilties and other expenses and can’t take the time to shut off a light or turn the thermostat down a few degrees once they buy. Also, if you move to a new city and you have an apartment you have to wait out a lease and find a new apartment where you are moving. This may be a little faster than selling a house, but still isn’t a “pick up and run” scenario unless you want to spend your life living with friends. Getting back your security deposit is at the whim of your landlord, and then you owe a new one at the new apartment. It’s not just about emotional security, it’s about physical security – not having your physical living space be at the whim of someone else. It’s also about the ability to control the quality of life associated with your living space. If you know you want to stay in your area for at least a decade or more and have a decent job there is no reason to not buy a sensibly priced home you enjoy. If you have a cavalier outlook and want to move regularly, or you don’t want the responsility of maintenance and chores, then of course don’t buy. That’s just common sense.

          • TA says:

            Diana, No, let me elaborate what are you missing here. yes, the other argument is if you can buy very cheap & pay upfront & take zero to minimal mortgage then it is okay. NO, it is not okay. !!.

            you lose mobility when you buy, it works on you emotionally & you will not even look for better paying jobs. buying a home root you to a particular location sub consciously. This money no matter how less it is, is not creating wealth for you. If you put in simple bonds, you will earn good money.

            as far as security is concerned, if crimes raises in your neighbourhood because of recent immigration, then you are stuck, you cannot even sell it, the prices will go down even further.

            Not to mention natural disasters, then it will be a total loss. or you end up paying house insurance for a num of years wasting money.

            as far as sucking up to the boss is concerned, if things get tough, one can move to a low paying job & rent a condo instead of a house or move further out of town or live with your friends if you are single. Also by not paying the upfront money to buy a house, you can use that money for such emergencies. so it is not the same as having a massive mortgage hanging on the head when you have to make the payout every month no matter what.

          • Diana says:

            For some reason there is no reply button for TA’s comment so here is my response:
            “you lose mobility when you buy, it works on you emotionally & you will not even look for better paying jobs.”
            Mobility – You can sell a home, or rent it out, and move. Even if you rent, you have to find a new place and wait out your lease for your old place – quicker yes, but not instant mobility. People won’t attack you with rifles when you try to fill your Uhaul for leaving your house.
            Works on you emotionally – Huh? What, picking my drapes and carpet scheme is going to give me a breakdown or something? I find renting considering more stressful – noisier, no control over your environment and living at the whim of a landlord who can raise your bills or boot you out pretty the second your lease is up (then screw you out of your security deposit).
            Better job- Also the idea that just because you own a home you can’t pursue better employment is ludicrous. I know people who have went through three or four jobs since they bought their house, constantly getting something better. Some of them rent out their first home for a decent amount of income because their new job pays way more than the one they had when they bought said home. Unless you are in a tiny, rural area with zero opportunity this statement is silly.

            “as far as security is concerned, if crimes raises in your neighbourhood because of recent immigration”
            Yah those damn dirty immigrants *sigh*. WTF were you getting at with this, aside from obvious racial dispersions? The Bhutanese and Burmese who have moved into my neighborhood got right to work. Their kids are polite. The adults know how to use a sidewalk. Bring me more of them, and less people like you who want to pick up and move at the drop of a hat. Renters are a plague on American communities, except in areas that can afford to attract very well-off ones.

            “Not to mention natural disasters, then it will be a total loss. or you end up paying house insurance for a num of years wasting money.”
            So waste…my house getting destroyed and me taking the insurance is bad…but my house not getting destroyed and me not getting my insurance back is also bad. *sigh again* You are paying a landlord for his insurance, instead of just paying for your own. They pay to own and maintain the home, then rent to you. Obviously then you are paying more to rent than they are to own, or they would be making no money. Silly.

            “as far as sucking up to the boss is concerned, if things get tough, one can move to a low paying job & rent a condo instead of a house or move further out of town or live with your friends if you are single. ”

            Or…you could just look for a different job. I’m not sure taking a “low paying job” would in any way be an improvement on your work environment. Have you ever worked in food service? Minimum wage office work? Farm labor? I have. It blows. No d-bag boss on earth at a decent paying job with benefits is worth making me go back to that. Enjoy being old and having NOTHING.

          • Diana says:

            Obviously then you are paying more to rent than they are to own, or they **wouldn’t be making no money.

  • Diana says:

    Buying a house because you THINK the value will go up is a total crapshoot – the nicest, most stable neighborhood might not be that way in ten years or it may still be a great place to live but some more “hip” area has become popular so housing prices fall where you live. There is only one reason to own a home – you really want one. Not because it’s an investment (although I personally feel it is if you buy smart), not because it’s “the thing you do” at a certain age and not because it is a status symbol. You do it because you feel your quality of life will improve owning a home versus renting. I love not having to wait for someone else to fix things, I love being able to do whatever I want with the place (improvements, paint, etc), I love not having to listen to people over or under me talking, their kids screaming, their dog barking (yes, my neighbors may do these things but it’s not IN MY HOUSE). Most of all I love the pride of my accomplishment, of knowing I worked hard to get (and keep) my house, that if I do right by it (keep it up, keep it clean) it will do right by me (keep me warm, dry and safe and give me personal pride). It is my little sanctuary from the world that no one (short of me not paying the bank while I have the loan) can throw me out of – you are not at the whim of a landlord constantly raising rent, throwing people out to replace them with friends or relatives, or selling the building out from under you (all of which I’ve experienced). Personally I pay less in a house payment (including mortgage, PMI, taxes, home owner’s insurance, etc) than I did for renting an apartment that was about 400 sq ft smaller. My utilities aren’t much higher because I bought a house that had been updated for energy efficiency (insulation, new furnace, newer windows, etc).

    I find it silly that people do the “starter home” thing at all (unless you know you don’t plan to expand your family for ten years or more). How about buy a house you really like that’s a reasonable size for your life plans AND you can actually afford long-term, even if times get tough. People have such a “keeping up with the Jones” mentality and think just because they get a raise they have to buy a bigger, more impressive house instead of enjoying that extra cash for recreation or savings. If you come into more cash improve your existing home – make it into what you really want if it isn’t quite as “grand” as you had envisioned. Moving over and over is wasteful, expensive and just plain stupid (the sheer annoyance of upheaval, packing, unpacking, etc). If you need to buy a new house every five years due to space concerns you either a) have too much crap that you’re probably working too hard to even use or b) didn’t family plan/think ahead about how many kids you really wanted. It’s super silly to keep moving houses every time you add someone to the family – if you plan on kids, buy a house with the idea that you will have a few. Obviously this isn’t a science, but it’s a lot smarter than buying some tiny starter home you KNOW will never be big enough once you reproduce. Also, it’s obscene that people think they need a 3000+ sq foot house for a family of four (or even less) now. Ever see a two family home from the 1920s? 900-1000 square feet per unit. Thousands of families raised two-five kids in these. The same can be said for the vast majority of post-WWII suburbs – very small houses that housed much larger families than are typical today.

    P.s. to the person who likened inner-city life to living in a 3rd world country – people on welfare here have it 100x better than most people in third world countries (and I’m speaking people who strictly need welfare and have no other “job”), so imagine how much better the average life of a middle-class person is here. My old boss was from India. He spent part of his childhood homeless living in a train station. He travels all over the world for his business and has stated repeatedly that most people in the world have nothing compared to what the poorest have in the US (aside from very extreme examples, which are rare) and that in many countries without sweat shops and other exploitive labor there is no work and people would starve to death on the streets from lack of any safety net.

    • Judith Mcgill says:

      Love your post. I am a single person living in a 1940’s 900sqft 1 bathroom house that before me raised 4 children (two families of 2 kids). It doesn’t even qualify as a ‘starter’ house today – where did that idea come from?

      My friends have good time in the kitchen/parlor (they keep coming!) just as folks did in my grandparents same size house.

  • PC says:

    I don’t necessarily disagree with the concept of your buy vs. rent formula, but it may appear you have left out the “mortgage interest tax deduction value” from the equation. I would think that needs to be considered as well.

    • Judith Mcgill says:

      We do not have that deduction in Canada. So we have to make the decision on rent (pay someone else’s mortgage) vs owning (pay yourself).

  • Dara Quinn says:

    Until people understand the Federal Reserve scam that’s been in operation for almost a hundred years we’re all screwed no matter what. Research ‘money as debt’.

    “If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless”
    – Thomas Jefferson

    “Give me control of a nation’s money and I care not who makes her laws.”
    – Mayer Amschel Rothschild

    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
    -Henry Ford

    “Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States” — Sen. Barry Goldwater (Rep. AR)

    “We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it”. — Congressman Louis T. McFadden in 1932 (Rep. Pa)

    “We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system…. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.” — Robert H. Hamphill, Atlanta Federal Reserve Bank

    “A great industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world–no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men.” — President Woodrow Wilson

    “I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs.”
    – Thomas Jefferson

    “The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers … The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest…”

    – Abraham Lincoln

    “To expose a 15 Trillion dollar rip-off of the American people by the stockholders of the 1000
    largest corporations over the last 100 years will be a tall order of business.” — Buckminster Fuller

    “Every Congressman, every Senator knows precisely what causes inflation…but can’t, [won’t] support the drastic reforms to stop it [repeal of the Federal Reserve Act] because it could cost him his job.” — Robert A. Heinlein

    “…the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 billion dollars in 1949 went directly to the private stockholders of the [federal reserve] banks.” — Eustace Mullins

    “Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits.” — SIR JOSIAH STAMP, (President of the Bank of England in the 1920’s, the second richest man in Britain)

    “People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest …But here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold. Interest is the invention of Satan.” — THOMAS A. EDISON

    • Judith Mcgill says:

      Thank you for the goods quotes – I will enjoy several hours pursuing the thoughts.

      Meanwhile, I will avoid chasing the financial news – a clever friend once told me “if you read it, you missed the chance to profit”.

      I own my small house, taxes and utilities are my only costs – I don’t care what others value it at (except for how that impacts the taxes!, retired I have time to pester local council) – it is at present assessed less than I paid, but I’m not selling so no problem – it is my home – $ investments are elsewhere!

  • Mr. Frugal says:

    I own 4 houses (other than the one I live in.) All 4 of them have rents higher than mortgage+taxes+insurance+maintenance. One is really close to break-even, because it was the one I used to live in, and has a 15 year loan instead of a 30 year one, and hence higher mortgage. But I actually make money each month. And that’s not including the tax benefits of depreciation etc.

    Essentially, I put 20% down (25% for the last one), and the tenants are buying me the rest of the cost of the houses plus giving me a bit of money each month. My only other cost is the time it takes to be a landlord. Not trivial, but worth it for this kind of return.

    Now is a great time to buy in many (but not all) locations. I wish I had more money for the down on another one…

    (And, yes, I have a sufficient fund for emergencies, both personal and rental related.)

  • billybob says:

    Well, real estate sucks now even if you get a great buy on foreclosure. What about the neighbors? The only best forecast for a property is still location etc etc.

  • ECNY says:

    It is “principal” not “principle” when discussing loans. Strange that someone supposedly knowledgeable about the subject doesn’t know this…

    • Bud says:

      Errors happen: sometimes it’s the wrong word spelled right, other times it’s the right word spelled wrong. Occasionally it’s both.

  • Brian says:

    Hello All, im fairly young and me and my 2 buddies came across an opportunity of a life time. Its possible for me and 2 fellow room mates to go from paying rent every month to owning the house. Its a two family apartment with a full basement. Basement is not being utilized to its full potential, actually its not being used at all. And our landlord wants to sign the papers over to our names. It was suppose to be for her son, but because of a terrible accident he is no longer with us. So she has trust in us, and wants to give away her property. The thing i need to know what kind of additional bills will i be seeing? And what should i ask before getting myself into something like this.

    • Arnie says:

      I would definitely get a lawyer to spell out the arrangement with your buddies.
      What happens if you’re not friends a couple of years from now? The house is still in all of your names.
      And get a second opinion on the value of the apartment and resale potential.

    • Bud says:

      Yes, as Arnie doesn’t quite say, if you go into business with your buddies then one very likely upcoming expense will be for a lawyer or three.

  • ked says:

    there’s a five year rule…….what has our society become.w e should go back to thinking that a house is necessity and not an investment;rather it is or not an investment. Americans value of homes is pathetic. we should be thankful that we have running water, a sturdy roof over our heads, square meals a days and some decent clothing….and for those who can’t afford it, the government gives to them (by way of tax paying citizens)….if you buy a house because it suits your needs and need to move up (or down) due to life circumstances, and you can make a little on the side, that should be perk.. For me, I’ve waited…and guess what, it will be worth it..my theory is not make a buck of my house, but to have a place that I can call my own, be more affordable than paying rent and you guessed it, soak the advantages of a tax benefit.I’m single and pay a large sum for taxes each year without having some type of write off….that will my perk…..oh by the way, 3.8% apr on a house that slightly more than it was in 1996..in CALIFORNIA…..wonderful.

  • david burns says:

    Closing costs? I have sold several three bedrooom homes in the past few years. I fix them and sell them. In every case, the deal has come down to my decision to pay closing costs – the buyer’s closing costs. Somehow, the poor buyer just can’t manage his or her closing costs. If the deal is to work, the realtor always tells me, is if I pay the several thousand dollars in closing costs for the buyer. So, I either pay a good share of the hard work and profit I should get, or the deal just doesn’t work.

    • Electricguy says:

      Buyers pay all costs for the sale, so you should just accept that they paid a lower price for the home than you would have liked. Your choice is to say no.

  • David Reed says:

    Hooey. I have been in my primary residence since 2006 and I am upside down by more than $20k. Two rentals I bought in 04 and 02 I am upside down by more than $50k. This story is useless with our current economy. Good rule of thumb in the 90’s maybe but no longer. We haven’t seen the bottom in my opinion.

  • Robert says:

    Actually 5 years is not an arbitrary number. If you were to sell the property for a gain then up to $500k ($250k if you’re single) of that gain is tax free if you’ve stayed in the home (as a primary residence) for at least 2 of the last 5 years.

    It’s a huge break…

  • Ben Took says:

    Been 12 years in Ca. man were we screwed by real estate agents,ins.companies,city government and flood zoning,EPA,taxe and fuel we are totally f—ed!!! But when they come to take they will meet hell at the door and Wolf hunting will be in season!!!!

  • Petey says:

    One thing I haven’t seen mentioned anywhere in the original article or in the comments is: reverse mortgage. If you own your home then much later on you can do a reverse mortgage and make use of all the equity you’ve got in your home, all the cash you’ve put into it over the years. If you don’t plan/need/want to just leave all that for someone else or for the govt then a reverse seems like a very nice option. Granted, I haven’t researched this much – there could be big pitfalls with this approach. But having heard of the concept of a reverse, it seems like a nice way to get some of all that hard-earned house payment $ back in your later years.

  • Max says:

    Pay cash for your house or buy a house requiring a minimal mortgage. Suddenly upward mobility is easy and this whole article is moot.

  • karen says:

    For all the twits who actually think that those who did everything right (put 20% or more down on their mortgages, got a nice fixed low interest rate 30 yr mortgage, improved their homes & lots to the tune of tens of thousands or more, paid exorbitant property taxes), you are brain-addled! While we got run thru the meat grinder app process, the BANKS let others get homes right next to us, no $$ down, creative mortgages, no improvements to properties. Further, they allowed flippers & rental property owners in, which devalued the development. All this, & the property taxes skyrocketed in NO relationship to the actual values of the homes, which were downsliding, cuz our development paid for the crappy TOWN’s improvements & we suspect so did our SSA! Then, it filled up irreversiblly with HUD people, and illegal immigrants, now it is a dumping ground for them. So much for waiting 5 years for it to better itself???!
    We never expected a huge return on this property; what we did expect was that OTHER people were scrutinized the same way we were. Didn’t happen. And while certain people got saved, others got thrown under the bus. And then Congress changed the rules so that unemployment no longer counted as income in the Obama plan, denying millions help. Curiously, the IRS says it counts! Also, the BANKS manipulated, dumped on, lied to millions of us under the Obama plan in order to deny us all help.
    Stop acting like everybody was a high roller or a scammer. Some of us did EVERYTHING right & got hosed.
    We never expected huge

  • Icarus says:

    Many commentors here seem to be expecting a lot from a blog post that was written 9 months? ago. Has the author even chimed in? People, you cannot cover every subtle point or one-off; this is a blog post not a thesis. Again, your mileage may vary.

  • Brandon says:

    The biggest thing that this poster doesn’t mention in much detail is the tax advantage of owning a home. Renting a home provides no tax advantage, whether as mortgage interest, property taxes, and qualified pmi reduce the tax burden sometimes by thousands per year. Generally speaking, points and prepaid interest also provide big tax advantages as well.

    There’s a lot more home buying strategies than mentioned in this article that would be helpful for someone to look at.

    #1 – Think about buying a 2-4 unit multifamily home. The extra rent provides you with additional income, and there are huge tax advantages like depreciation.

    #2 – Buy a home that is “leading the market” in price, i.e. a foreclosure or short sale, preferably with as much cosmetic damage as possible. Even in this market, you can get a good equity position by purchasing a home and using a 203k loan to fix the place up. Depending on the condition of the property, you could be getting a discount of $2-$3 for every $1 of work to be done. A house needing an extra $20,000 worth of work (cosmetic/new kitchen &bath, etc) could give you a $40,000 – $60,000 discount.

    • David says:

      The tax deduction is a red herring. Agents love saying it, but they don’t know what they are talking about, and leave out a couple of things:

      1. Because you are paying the full interest at cost, you are “paying for the deduction.” The net effect is a government subsidy of the cost interest. You are still paying interest.

      2. There is a benefit only if the deduction is greater than the standard deduction. (You get the standard deduction anyway, so there is benefit only if the deduction is above that amount).

      3. If you make too much money, you don’t get a deduction as the AMT kicks in.

      4. The deduction provides the maximum benefit only if you are in the top bracket. So you have to be rich to take full advantage, but if you are rich enough, you may lose it all because of the AMT.

      Every agent that says, “you get a tax deduction” should be given an electric shock through their nipples.

      • Bud says:

        Totally agree. The tax code is not a decision factor for buying a home.

        I visited a house for sale last week… the first words from the agent: “This home will make an excellent investment.” A $1.3M house with linoleum counter-tops. You would think for that money they could have installed granite.

  • Bronson says:

    Great discussion, I am from Canada. I as well have owned homes that half gone down -40+% at times, 1982, 1990, 1996 and here as well 2008 only 25% But back up 40% now )they go up and they go down, done right over time and make millions, remember the secret buy low. Many cycles here in the past thirty years however always up in time. Here there is no walking away which I am glad as those I held (tenant paid off mortgage) are now up over 300%+. Here one has a loan it is similar to the comments about Florida, they will hunt you down for any loss after foreclosure.
    Real Estate is actually very simply, it goes up in price/ demand similar to the job numbers when they go up so does the economy. We have had a government party come in and spend, tax and heavy red tape whererby everytime they get in the result is similar the market crashed within two years about 35-40% however each time it only took two years after that party was removed for the jobs/economy to come back and the real estate to take off. I realize this crash was not caused by this senerio but it is now the problem. (Jobs, economy)
    I am sure that Real Estate in USA will come back without a doubt, two years from November if you remove the current goverment and get jobs/economy going. You can play the game and make money or sit out. Where else can you take $15 or $20,000 and have a $300 or $400,000 investment, not stocks great leverage.
    Rent or buy ?; I just bought a home in USA, it cheaper to own then rent , prices are so low we paid $400,000 here that home would be 2.2 million. If I could I would buy ten or as much as I possibly could.

    • VickyC says:

      Your words are so true Bronson . I also realise the current situation in the US is a based on a different cause and effect. Here in Australia we are almost 3 years into a Labor Government’s term…our interest rates have risen from 4.5% in 2008 to 7.39% in 2012. As a result homes are losing value as the market grinds to a halt, people are losing their homes as they cannot afford the increase in interest rates, business struggling as people do not have money to spend and the loss of confidence has us squirreling away what we can until the economy see massive change. This situation also occurred under the same Government in the late 1980’s. Australians are suffering huge hits and we look forward to better days after a change of government. All we can do is hold, pay for the mess and not let the fat cats bring us down !

  • ElectricGuy says:

    I think the author entirely misses the point by recommending extra payments to ease an early move. Those payments have little to do with anything. The equation I’m interested in is “What’s the bottom line?” There is much more to buying a home than just finances, but that seems to be all this article is about.

    There are costs associated with buying and selling a house. Regardless of who pays loan costs or real estate agent costs, the total can be about 10% of the loan.

    Then the buyer needs make a comparison of rents vs. monthly ownership costs (PITI, maintenance and repairs, etc.) for comparable units.

    Next, there is a tax advantage to ownership via the mortgage interest deduction, but it’s not as big as many people believe since the standard deduction is half or more of a moderately priced home’s annual interest.

    Finally, there is the belief in appreciation or depreciation. If you believe home prices will be stagnant or declining, there is almost no reason to buy a home. Owning in an appreciating market helps you stay with the market as well as giving a nice boost to the bottom line. But if you’re moving up, your new market was probably rising faster than your old one.

    The bottom line varies per situation, but it’s simplistic to think there is a set number of years you should remain in a home.

  • JK says:

    First of all, why do you need to own a house? What is this nonsense that the landlord will throw you out? And if they do, so what? Go somewhere else. Don’t act as though there is no other place to go for rental!

    Earn, save, invest, and retire wherever – Bahamas or someplace else! What do you need a house for? Pay such a large mortgage, live under fear for 30 yrs till the mortgage is paid off, and you cannot move to another city for a job/etc.. and finally end up losing on it.

  • Matt says:

    “if you assume that the long term trend of real estate is up”: if you’re still assuming that after seeing what happened the last couple years, you’re a MORON and should go take all your savings and set them on fire. It’ll save you the commission if nothing else…

  • Andy says:

    It is evident many of the comments here are from people under 40. I feel your pain, but you are still relatively young and this is your first real recession. Have patience and faith, all will work out as it should. I am 54 now, this is my 2nd big recession. Bought my first townhouse in the recession of 1980. The price was $58,000 the interest rate was 13.5% (prime was 19%) The payment was $858 a month and I was making $30,000 a year. God, I thought I was gonna go bankrupt. I moved 5 times between 1980 and 1997. I sold 2 for a profit and 2 for a net loss. The home I live in now I bought in 1997 (sold one and bought one at the then bottom of the market). It is less house than I can afford but it is very nice AND it is PAID FOR. My advice is that if you are looking to buy your first home and you have to put it on a 30 year mortgage, that’s fine, but your goal must be NO MATTER WHAT – 30 years from the first purchase – the home you are living in should be paid for. The only reason to buy is to eventually OWN OUTRIGHT. If you own your home outright, you’ll never be homeless and you’ll be financially secure. As for those of you advocating walking away – shame on you. Honorable people pay their debts as promised on time. For those of you who currently owe more than it is worth, don’t worry, there is no loss until you sell. Patience and faith, this too shall pass. The home I bought in 1989 dropped in value by 40% 6 months after I bought it, it took nearly 9 years to get back to even, the guy I sold it to, sold it 4 years later for a 300K profit. These difficult times are teaching you and your children good habits. Hang in there, pay down principal as fast as you can and all will be well.

    • Barbara says:

      I’m not an advocate of “Just Walk Away.” At the same time, the statement “honorable people pay their debts as promised on time” just doesn’t square with reality. Sometimes honorable people just do not have money. Good examples: large medical bills.

      Tens or hundreds of thousands of dollars do not fall into people’s hands because they are “honorable.”

      • michkat says:

        I just think sometimes people live too high on the hog. They want, so they buy and pretty soon, they cannot manage their debt. And then they walk away. THAT is not being honorable.

    • words2liveby says:

      Andy, I’m from Australia, not quite the same scenario as the US.

      I am close to your age, and did exactly what you advocate in your post- and now I own my own home. (I had a couple of lucky breaks in life- and paid it out in 7 years not 30).

      I also bought modestly, was happier with less extravagant hobbies than my friends, and now wake up every morning, knowing the home is mine. My work is modest, my income is modest, I have no debt and no credit card.

      The only wealth I have is my own home, and a debt-free life.

      At the risk of getting flamed here, that- “a debt-free life”, to me by age 47, was an achievement.

      I know people who live the high life, jetski, boat, multi-cars and condo.

      I just heard from a friend after 25 years, who had all that and more, and said she would gladly have given all that up, (lost it all now) to have just ticked along steady through life, as I have.

      I hope someone finds something of inspiration here in my post, I didn’t write this to label anyone as “right” or “wrong”.

      Cheers

      • Judith Mcgill says:

        words 2 live by – agree with you = pay as you go, enjoy what you have, never-ever consider your home an investment tool – it is a place to live! We each make financial decisions that impact our lives ==but we all end up dead when possessions don’t count.

  • Maggie says:

    The five year rule was very very true before 2006. I bought my first house in 1994 and sold it five years later and made a profit, I lived in my second home for 5 years years and made a very very large profit. I bought my 3rd house in 2006 not to say I paid of $90,000 dollars worth of debt and put $65,000 down on my new home that was inflated. My mortgage is under water but because of the Obama adminstration (THANK GOD FOR SMART PEOPLE) I got a loan modification on my mortgage, although there in no equity in my home. I am still in it and living just great. thank you President Obama for thinking about the people, because the past 8 years before your the only thing the p[oliticians were thinking about was there own selfish bigot azzes.

  • Naty F. Laky says:

    Just like snow flakes, everybody is different. Do your homework. Check if your situation is appropriate for the 5-year rule. If it is and you are happy with what might happen in 5 years, then do it. But in spite of your diligence, it can still go sour. If you think 3 years, or 8 years, or even 10 years are more realistic, then buy with those numbers in mind. If you have doubts, then don’t. You will live happier. Life is about being happy. You have to find out what will make you happy. Just like snow flakes, happiness is different for everybody. Trust me. I am a happy. Remember, 200 years from now almost all of us living now will be gone and nobody will remember us, unless you did something extraordinary and arguing about 5-year rule is not one of them. Be happy.

  • Icarus says:

    there’s no such thing as a riskless investment. And the higher the reward, the higher the risk. Like Jack and others have said, if you look at a house as a place to live for the long term and not a quick profit vehicle AND vette your purchase by choosing a location with good schools and amenities, you should do alright over the long term. If you are trying to get a quick profit, you have to understand the risks.

    @Richard, you asked where you screwed up. I’m sorry for your situation. Based on what you said, taking out money against your equity 5 years ago when everyone had to know the bubble was bursting was your “mistake. ” Maybe you had to make those updates and maybe you thought that pole barn was a good investment. Apparently it wasn’t so. Ask yourself: if you had done it one year sooner or one year later, would your situation be any different?

  • Jack says:

    Buy any house you can afford as long as you intend to live in it (almost) forever (just like when your parents and grandparents did). In 30 years it will be paid off and no matter how the market goes you will have a nest egg, it’s just a matter of how big. No one can predict the market. In some places it has corrected and gone up 9which doesn’t mean it won’t come back down). In some places only time will tell. Buy something you can keep where the cost is within your means.

  • Just as all real estate is local, each case is going to be different. Do your homework and don’t think there are ever any “rules” in real estate (other than legal rules, of course).

  • Joe in Cocamo says:

    The theory here is all fine and dandy in a robust economy, not now. Though I am not upside down, I’m either even or slightly ahead of even on what I owe versus the home value now that the housing mess has reduced the value by a significant amount. I’d have changed houses/cities a long time ago if I could sell and use that money for a downpayment on a different house. Even if I had a little of that equity left, I’d do it knowing that in the long run I would even out by an eventual increase in the new home. That’s not possible now. That’s what is holding this economy back. Nobody has the ability to move to get a new job in a new city if it means selling a house and hoping to buy again. I refuse to sell and then have nothing for a downpayment, so that when houses do go back up, I am stuck renting.

    Terrible advice, really. Do some more homework and come back at us with a solution for the current situation, not the dream-equity situation of 2005.

  • steve says:

    As always, its location, location, location. I bought my house in Tampa, which is among the hardest hit metros the same time the first commentator said prices were still falling (June ’11). Well, I found that to be faulty at the time, and yep, I was right. Plus, I made sure to get a home that I would make my closings back on in the resell. 6 mos. later and my neighbor is selling their house for $25k more than I bought ours and is a shadow of what ours’ is. The 5 yr rule is a good rule of thumb, but it isn’t infallible.

  • Jonathan says:

    I just bought a condo in Vietnam for more than $50,000. I’m financing it for five years. It’s a small, and I’m paying almost $1,000 a month to start, but it will be mine in five years. At that time, we’ll probably move out and buy something else but keep it for my in-laws or rent it out.

  • It is a very good time to buy. The worst is over and the interest rates are low. It is unlikely that the market would reach any lower and even then why take the risk? The market might become better and you may lose the good interest rates later on.

  • Fred says:

    My wife and I have been renting a sub 1000 sq ft apartment for $1500 a month. That’s a lot for so little but it was necessary. When we got married we worked 100 miles apart from each other and moved to the middle which just so happened to be smack dab in the heart of downtown Houston. You can’t rent cheaply there. Even moving a couple miles either direction would have added to an already horrible drive since traffic would have factored in much higher for one of us.

    Fast forward to today. For some stupid reason we had $32K in cc debt that we shouldn’t have had. We paid it off in a year and the money started rolling in. I got a job much closer that will allow us to move out to the suburbs to keep each of our drives around 30 miles each. That’s not bad for Houston. Some people in other parts of the country don’t understand how this city and it’s jobs are spread out. We started saving money. Our credit scores are in the mid to high 700’s. We need to move but the question is whether or not renting for another year is going to do anything for us that buying now wouldn’t.

    We are currently trying to buy a house. We qualified for a $700K loan and are trying to purchase a $232K home on a 15 year loan at a 3.5% interest rate. That’s near laughable! With such a short term loan and low interest rate we aren’t putting much money down. As little as possible which for us is a lowly 3.5%. We’ll still hit the equity mark of 20% in that house in only 4 years and we still aren’t going to pay the minimums. Our plan is to pay it off in around 10 years. Yes our out of pocket per month will rise over what we pay now for a number or reasons. We’ve got high property taxes, utilities will go up and maintenance is our responsibility. Those will never change regardless of when we buy a house but the odds of an interest rate staying going even lower or staying here forever is pretty slim. It may not move for a little while but why risk it? The house is also 3X the size of our rental. We plan to stay here until our kids graduate high school. We don’t have any kids right now. The house is 18 years old in an established neighborhood and prices in this part of the country are fairly stable. We aren’t California where houses even today cost 3X to 4X more than they would cost here which is ridiculous.

    I don’t only look at time as the main criteria to decide if renting is a better option but also interest, condition of the property, how much you have in the bank for a rainy day, as well as your personal comfort level and space requirements. We could certainly buy a house the size of our rental and come out way ahead financially but we’d probably be mugged walking to the car. If we tried to rent a house the size that was are wanting to buy we’d pay far more. In the end though the math told us that for our personal use making the assumption that the house never increases in value that we’d need just over 4 years to “break even” on it so I’d say not too shabby in relation to this article.

  • Brian R P says:

    I have bought numerous foreclosures as investments, “post crash” and here are my comments.
    1. Overall the premise of this article is good advice. Consider your house a long term investment. 2. Foreclosures today can be bargains and often go for the lowest prices in the neighborhood. 3. Home owners can get extremely low financing today. Make sure you get a 30 year fixed. This financing will not be around when the U.S. economy recovers as the FED will raise interest rates.

    My advice: Right now is an excellent time to buy. There are bargains combined with low interest rates. My opinion is that the market has taken most of the price decline already so we are approaching a bottom. In certain submarkets we are already there.

  • VickyC says:

    Hey guys this is very interesting. Let me tell you Australians could only dream of tax deductible mortgages on their family homes and fixed rates for 30 years. On our homes which are called Principle place of residence we pay the mortgage with no tax relief, are paying 6.7% interests on our loans and fall on our knees every 3 months when our Reserve Bank decides whether they will raise or lower the interest rates. Australia is not the lucky Country at all. Our system is a disgrace compared to the US.

  • josiah p says:

    Forget the 5 year rule and apply the 15 year rule. Buy an adequate size house, get a 15 year mortgage, save a ton of interest expense, have the house paid for by the time the children are ready for college, have the avaibility of another 15 year mortgage if needed, and then be free and clear by retirement, and just bite the bullet !

  • Austin says:

    I’ve realized that if I buy a property I don’t look at it as a long term investment anymore. Buying real estate these days is like trading in the stock market–short term. In some cases it’s longer but that’s only if you want to rent or lease that property.
    In Austin, TX home prices have stabilized but there is still a lot of supply. Rent is sky high and some people are dumb enough to pay the 5k/month rent to live downtown…not me. That is a waste of money.

  • Smarty says:

    In my neighborhood in LA the rents are substantially higher than the cost to buy. There are so many people with screwed up credit, the sky’s the limit for rents right now. If you have a job and good enough credit to buy a condo you can have a payment far less than renting an apartment. These old fashioned rules don’t apply here.

  • Kate says:

    You have to consider the cost of rent, the area you plan to live (urban vs. rural), income stability, family size, and what houses you can get on that monthly budget. Personally I don’t believe in the 5 year rule… I’d never buy a home I only planned to stay in for 5 years. With interest and real estate fees I’d be only breaking even, even before the housing crisis.
    I’m actually about to purchase my first home. Why? Because for roughly the SAME cost as renting we get much more room and space. Why would I want to stay in a 1 bedroom apartment where my rent can go up at any time, and i may have to move when the space gets too small? When for the same price I could move only once and lock into that low price and get the larger space now? Financially that makes NO sense. Renting is so much more expensive then a mortgage! Rental rates are going up and home prices and interest rates are low!

    For me its a no brainer! Renting is just throwing money down the toilet!

    Besides, I’m not happy with no yard and a space i can’t express my personality in. We need our own space, i’m so done sharing a wall, a parking space, and a tiny little patch of grass. I want my kids to have a yard to play in, not a parking lot.

  • I sold my house last year because of a work move. Luckily, I made a small profit. Now I’m renting for the first time in 15 years. And man, is the cash rolling into my saving account! I never realized how much all the nickle and dime costs to own a house add up. Now if the A/C, dishwasher, etc breaks, I just call the landlord and he fixes it for free. In 2-3 years, I”ll probably save enough to buy a house for cash, if I want too. But with home prices still dropping, what’s the rush. I have to say that in the post-crash real estate world, renting beats owning hands down.

  • Dumpicles says:

    Lol, no, it would just be to satisfy my curiosity, no different than trying to determine how many licks it takes to get to the middle of a tootsie-roll pop. When I made the spreadsheet, I hadn’t even heard of the five-year rule of thumb, and I was curious what the answer was. Now, things are a lot different–the mortgage rates are much lower, but so are the marginal tax rates, and I’d love to know how much of a difference it makes. I really doubt it really matters much, so long as you’re in the 4-7 year range.

  • Diane says:

    Dumpicles, Loved your post. Was thinking you were so smart and analytical and then read your last line. It made me laugh out loud. Whole thread is way to serious. Live where you love, and can afford, and enjoy every minute of it. Who knows what tomorrow will bring

  • Dumpicles says:

    Before I bought my first house about 15 years ago, I created a spreadsheet designed to answer this question. I designed it so that I could input data such as the purchase price of the home; the amount of the mortgage; the mortgage interest rate; a lost opportunity cost for making a down payment instead of investing that money; inflation; closing costs; expected annual maintenance costs, expected federal tax deduction from the payment of mortgage interest; utilities; rent and utilities that i would pay if I didn’t purchase a house; the rate that my rent would increase annually (this is a biggie); property taxes; the federal tax deduction from property taxes; the price I expected to eventually sell the house for; etc., and the spreadsheet would calculate the amount of time I would need to live in the house to reach that break-even point. It took me a long time to compile this spreadsheet, as you might imagine.

    What I found was that, given the assumptions I used and assuming that I could sell the house for exactly the same amount I purchased it for, it would take exactly four years and ten months for the house to be a better financial choice than renting.

    Back then, the interest rate on a mortgage was around 7.25%, which is a big difference from what it is now–but it was interesting that I came up with essentially the same number as this rule of thumb. Unfortunately, I can no longer find the spreadsheet . . . 🙁

  • HomeForSure says:

    This 5 year rule is good, yet is horrendously arbitrary. Factors such as market area, down payment amount and the loan type all factor in more than the passage of time.

  • Dr Ryan says:

    Is this advice coming from someone who lives in 2006 who magically came into 2011 to grant us this sage wisdom? C’mon!

    The facts now as they stand with market prices for housing are such that if you are a homeowner, you’re lucky to be not taking a hit after only five years. I bought my house in 2006 and my house just recently made it back to the value of what I bought it for.

  • BGK says:

    There are no five year rules or any rules valid today when it comes to buying property; every area is unique and different, though overall it’s still a dumb move. Housing continues to go down and will go down in most areas (and possibly some that haven’t gone down much yet) as long as unemployment is high, foreclosed inventory is high and the overall economy remains unstable and weak. When I hear people saying they bought a home, I wonder, what makes them think it’s a good time to buy? Have prices remained stable for at least six months? Has the economy sharply improved and has the number of people employed gone up significantly?

  • Lobelia says:

    When I first went looking for a house, I was asked how long I intended to live in it. I said I planned to live there about a year and then rent it out. I bought a condo. Each year I’ve lived there, I would have answered the question the same: I hope to leave in about a year. But circumstances kept me here. After five years or so, the condo association board instituted a rule that prevented more than a certain percentage of units to become rentals, effectively preventing most of us owners from renting our units out. I’ve now been here 10 years and, due to a number of owners having gotten special permission from the board to rent their units out due to their distressed financial situation, I am so far down on the waiting list to rent that I doubt I will ever be able to rent it out. I’d still like to move in the “next few years,” but I probably can’t do so because I can’t rent my unit out and can’t sell it for as much as I paid for it 10 years ago. I’m stuck here.

    The point of my story is that unexpected circumstances can often completely mess up that estimate you made of how long you intend to live in a house.

    • Icarus says:

      Lobelia, are you telling me in 10 years you haven’t paid down enough of your mortgage that you hopefully purchased with a decent down payment to be able to sell? maybe not for what you paid 10 years ago, but for enough to either even out the mortgage or bring only a small amount of money to the table?

      As for renting, walk into your associating meeting and toss a set of keys (not your actual ones of course) and say “either let me rent my condo or you can have my place as it goes into foreclosure, good luck with the association fees”.

  • Lori says:

    I’ve read all of your posts and it seems to me that every one of you have missed the point of buying a house. Its not about 5 or 10 years or moving on to bigger and better living quarters. It so that when you hit your retirement years and your income drops (hope you will get to see SSI) the house you could afford to make payments on for all those years is PAID OFF! and NO landlord can throw you out on your Sorry OLD Arss. Just amagine being 60 with 29 years left on your Mortgage OR worse no where to live because the retirement you planed on got voted out by Congress after you had paid into it for 30 years.

    • Darren says:

      Lori, you get it. If a landlord decides not to renew your lease, you better start packing. You might have to move to a worse area. Owning your own home in area you like to live in is much better. Before I bought my home, I lived in an apartment with a month to month lease. The landlord’s taxes jumped up, and he passed on the cost to the tenants. In one year, the landlord raised my rent $25, then six months later he raised it $200. That was the catalyst for looking into home ownership. In 15 years, I’ll own my home, and it will be an asset to my children to do with it as they please. The problem withthe premise of “renting cheap” and saving the difference is that you get what you pay for. If you are even able to find cheap rent, it’s probably in an area you don’t want to live in. Secondly, most people aren’t disiplined savers, so it’s more likely any savings would get spent on vacations, or other things. I live in NJ, and cheap rent=ghetto. I can only sepak for my part of the country, but even rents in bad areas ain’t cheap. Property taxes go up, and landlords jack up the rent. 15 years of paying the bank gets me a 3 bedroom house. 15 years paying a landlord gets me a nother lease to sign, if I’m lucky…

  • Jeremy Chiba says:

    If everyone paid what they thought a house was worth and could afford what they thought the house was worth when they bought we wouldn’t be in the situtation we are in. Enough of all the crying in these comments about what the book value of your house is. If you made a decision to buy a house you could afford, for the amount you thought it was worth, then you only have yourself to blame and knowone else if you made a bad decision. Live with it and make the the best of the situation you find yourself in. Housing is not an investment and if you though of it as such you should of known all investments have risks.

  • steve says:

    No mention at all about tax deductions. My mortgage interest is basically the only tax deduction I have. Where is that in this “anal ysis?”

    • Bud says:

      Not relevant, that’s why it isn’t mentioned. You don’t make a home buy/rent decision based on the tax code.

  • Lauren says:

    My own opinion:

    * Buy a house you would be willing to own for the rest of your life.

    * Pay only UNDER present market value (even though this means turning your back on some tempting homes, be fiscally wise and look for one of the many deals available today.)

    * Put at least 20% down. If you don’t have that much saved up, rent cheaply until you do.

    * Lock in a 15-year or 30- year fixed-rate mortgage. Personally, I prefer the using a 30-year mortgage, and paying down extra as you see fit. By doing so, it’s possible to get nearly all the financial benefits of the 15-year mortgage without committing to one in these uncertain times.

    * Buy within your means but stretch as much as possible. If housing ever recovers, you’ll profit more; if it doesn’t, you’ll have a bigger and/or better house for the rest of your life. Remember to factor in the tax deductions, but don’t count on them! Times are changing, and the “untouchable” mortgage deduction could one day be a thing of the past.

    * Think about school districts, even if you don’t have kids. Someday you might end up raising a family in your house. Also, homes in good school districts have a wider pool of interested buyers and can bring in more money at resale.

    * Make sure you can live with the negative aspects of the home. All houses have drawbacks, but some are worse than others, and it’s all relative. For example, does it have only one bathroom, and is that a problem for you? What if you can never afford to add another? Or, are you an avid gardener and is the property’s square footage a bit too small for you? Will this be an issue for you over the years? Is the street too busy for children to safely play? Will you regret that later? Etc. Only you can determine what matters and what doesn’t, but don’t kid yourself and don’t pretend away certain issues that really do matter to you.

    * Don’t think of a house as an investment. You may make money, you may lose money. Don’t let your judgment be clouded by overly-sentimental emotion either. Falling in love with a house doesn’t make it a wise purchase. The best place to be is somewhere in the middle — your purchase should make sense on a financial level, meet your needs on a practical level, and make you happy on an emotional level. You may live in this house for the rest of your life, so if you can’t at least say these three things at the start, you probably haven’t found the right house yet.

    • Weena says:

      Lauren, I think you are brilliant . . so much common sense. Maybe becz my husband & I intuitively basically did what you say.

      Two yrs ago, we had to move (job).

      Bought a foreclosed property very quickly, figuring to stay 5-6 yrs till the youngest kid (of 3) graduated from the excellent area high school, then we would leave. Put down a chunk of cash from selling our other house (having been in it 25 yrs) and leveraged the rest as a HELOC on an 8-yr payback term against our rental property that we paid off years ago. We pay less per month than local rentals and we didn’t pay into the ridiculously expensive mortgage racket. Basically we are paying ourselves back against the other house. Our interest is prime minus x; we secured the terms many years ago during the “hot” market while the rental was appreciating. The HELOC was there & waiting when we needed it with the terms already locked in. (Another advantage of owning vs renting–unless you abuse it.)

      My “job” as regards this house is to maintain it, upgrade minimally to keep it marketable and livable, and otherwise not to overdo. I am doing most of the work myself (good ole sweat equity).

      Now we see that we could be “stuck” in this house because the market is plummeting.

      But. It happens to be a beautiful house in a fabulous old neighborhood. The price we paid seemed low at the time, now it looks like that’s where the market was going anyway. If we are stuck, we’re okay here. If we can get out, that’s okay too, we’ll follow the original plan to downsize. Even if we sell for less than we paid, compared to renting we’ll still be happy because of x number of years in a very nice house/neighborhood, great schools, great neighbors, etc. Who knew we’d like it so much?

      I think this is a rule of life. Don’t invest yourself heavily in something you don’t honestly, actually LIKE, thinking “I’ll just move on as soon as I can afford to.” Like relationships. Jobs. Graduate degrees. Neighborhoods. Make sure each step has value & worth, in both the short- and long-term, because (1) you could be stuck there; and (2) each step leads to the next & influences where you’re going.

      I love this house yet am willing to leave it if/when the market allows–AFTER that final high-school graduation!

      For some people,house-hopping is a form of investment. So, naturally, different rules will apply. I think you have to know your “category” to know which rules work. We happen to put family first (schools, jobs, feeling at home, feeling safe, warm & happy). So not making a “killing” on this place is okay for us. But if you are the kind of person who has to make a bundle on everything you do in life, follow your own rules for doing that. In the end, we will all have lived the life we chose and you have to appreciate, enjoy, & honor your own choices and results.

      • Darren says:

        Well said. You should never buy property in an area you hate, thinking you’ll be able to move in few years. I bought at the height of the housing bubble, and even then people were wondering when the bubble would break. If your bought anytime from 2003-2007, you had to know that the house you bought might be the house you were going to be in for a while. Had I taken all the money the bank offered me, I would have already put the keys in the mailbox and walked away. I would like a bigger house for my family, but what I have now is livable. I’ve told my wife to start falling back inlove with the house. We are fortuante we didn’t lose a lot of value on our home. for most people , their home is an investment, and like the stock market, it goes up and down. It really depends on what you are buying a house for, either to live in it, or to make money.

    • will says:

      While I agree with almost everything being said in this thread and this post in particular, I have one gotcha: do not ever pay more than a couple of dollars in additional equity into your home. Reasons: 1. this will work against you in any negotiations with the bank. 2. put the money in a safe holding place (ie, savings, cd) that way, if and when you run into job loss, medical issues you still have the money and can continue to make your payments. When the money in the savings account reaches the balance of the equity, then pay off the mortgage. Make sure to leave yourself some extra money for taxes and insurance since you don’t want the county to own the house.

    • JC says:

      Lauren and Weena, thanks for the posts. I rushed into purchasing my current condo after my first condo deal fell through the week of closing. Although the unit is nice, a good size and I got a good price (as a foreclosure) the neighborhood is not one I can live with. I also have an awful HOA so I have been miserable since I purchased in 2009.
      The only saving grace is my low monthly payment, which is allowing me to save up for a new place. I’m much more savvy about the buying process but your post will make me think harder about what is a must in the next place I buy. I know I want kids in the next 10 years, so I will actually check the school districts out instead of assuming I’ll “upgrade” my home in 5 years.

  • Marie says:

    These days only buy a house you like, in a place you like and plan to live in forever. A house is no longer an investment. It is more like a new car, it depreciates the minute you permanently get the keys. I am in a state where you cannot just walk away, so even though I am 75k underwater I am stuck. The only reason I am not 125k under is I had been paying ahead, but when the market crashed, it took 50k of my hard made pre-payment value with it. So I strongly re-statem unless you love the house and want to stay there until it is paid off and then sell it for whatever you can get, do not buy.

  • Jackinabox says:

    People that can’t walk away are stuck. I walk, I lose my job. The bottom line is that the U.S. Governement needs to help it’s own like it helped the big banks, Hatians, Iraq’s, Japanese, and so on, so on…. The American people need help.. I don’t wan’t a hand out, just stop the stupidity in Washington. Pay off the debts of war and borrowing and let’s get back to being GREAT…Our housing issues will take care of themselves, if Washington quits giving handouts to everyone in the world, including illegals and lazy Americans

    • Bud says:

      I’m a lazy American and I like my handouts, thank you. Yeah, its an amazing country — I don’t work and they give me money! But not enough to buy a house. Oh well, can’t have everything.

  • Neo says:

    Federal Income tax Deductions/Tax Breaks/ State income tax deductions /Tax Breaks/ Municpal tax Deductions and tax breaks (Hello NYC). No serious analysis of cost of buying versus renting can be done without these parameters I don’t see these mentioned. Therefore I conclude this is not a serious analysis.

    As far as the five year rule…. well the current market proved that’s bonk. Its not five years or three or seven or one or ten. Its a simple formula of (what you pay) – (closing costs) versus the market value will be when you plan on selling (minus closing costs). Then add the cost of renting and benefits of owning (tax deductions) and subtract the cost of owning and poof that’s it.

    The current market fluctuations have had much more influence then any closing costs.

    • Icarus says:

      Ah Neo OF COURSE there is no serious analysis. It’s a rule of thumb, like double your hourly rate and that is approximately what your annual salary is…not a hard fast rule like buy stocks low and sell high.

      Almost everyone who has commented here seems to want to either bitch about their circumstances or poke holes in this blog’s subject. You’re reading a blog written by someone for whom English is not their first language…of course it’s not gonna cover every situation out there.

      In a normal market, one that wasn’t perverted by the subprime lending and the heloc your future for vacation now mania, 5 years is a good break even average. Your Mileage May Vary!

  • HawaiiGuy says:

    Another one more thing. My first-year property taxes were quite low, and I was doing pretty well. But the second year, the city finally got around to assessing the value of my house, and my property taxes went sky-high. And, of course, neither the bank nor the real estate agent told me about this, because they just wanted to make a sale.

    • Darren says:

      Defintely have to check the tax assessements before you buy. When I bought in 2004, the houses I looked at had not been reassessed in 2-3 years. You don’t want to be smacked with a large tax bill.

  • HawaiiGuy says:

    I would add one more long-term cost: city-proviced costs of water, sewer and garbage collection. I bought a house, never checked these prices, and was hit with very expensive water, sewer and garbage collection.

  • Camp taji says:

    Yes, please continue to rent. I paid off my house 10 years ago in Florida. Sold it, moved to NM. Got a better house for less money and insurance. Bought five houses in four years, cashed out 401(k) and paid off three.. I am making 12% on my ression proof investment not to menition the tax breaks that being a landlord brings.

    • Bud says:

      Recession proof? If you have your major investments in real-estate then you are betting on continued property value appreciation. 12% wow, cool, good for you. And you handle risk by ignoring it. Way to go.

  • Doug Glass says:

    There is no five year rule; there is no X year rule. The way the math works out is you need to stay in any house long enough such that when you do sell it you’re in a positive cash flow situation. In other words, after the sale is done and ALL sale-related bills are paid, you make a deposit into your checking or savings account.

    Obviously the greater the deposit the better. But if you financed 90% or higher the chances of you getting a positive cash flow after sale is virtually nil if you stay only five years. If you managed a 100% financing you’re even less likely to make money on a sale. The more you financed, the worse off you are.

    The math is really simple: get the payoff amount from your mortgage company, check what comparable houses in your area are selling for and subtract what you owe from the sale amount expected. If the number you get is negative you’ll lose money in the sale. If the number is positive that’s what you’ll have to keep less your closing obligations. If the number is negative, divide that number by the amount of your yearly payments LESS ESCROW PAYMENTS and that number is the years you have remaining to get to the break even point.

    You can help yourself tremendously by making double or triple payments against the loan principle. But you need to run your own numbers and disregard any generalizations concerning “rules”.

  • Looking to Buy says:

    Selling after 5 years or less may not be a bad idea, even if you fall slightly short of breaking even (buying vs renting), because the value of living in your own hand-picked personalized home is worth the price. The article didn’t mention this factor.

    Depends of course on how much money you lose buying vs renting for this number of yrs. A large shortfall would be hard to swallow.

    In today’s rocky economy, no one knows where we’ll be 1 year from now when it comes to home prices and interest rates, let alone 5 years. So for those who bought before the market started to crash, don’t beat yourself up; you couldn’t predict this, you did what you thought was best at the time…

    And I plan to buy my first home now based on current favorable conditions. I worked for one company for 10 yrs, was laid off a year ago, and found a new job a few months ago. I’m targeting homes w/ prices that would allow me to use about half my savings for the down payment and closing. If I have to relocate in a few years, and I may have to, I can rent it out and have enough cash left to buy another house. Can’t over analyze what the future may hold when it’s so uncertain, just do what makes sense now and definitely err on the side of caution. Must have some cushion to allow options in case of income interruption or relocation.

    • Bud says:

      We like renting because we can better control the risks. We want a place to live, and we like being able to move when we like. Rents in my area appear to be about half of what most people are paying on mortgages for comparable properties.

      The 5-year rule assumes that over 5 years the housing prices must rise, and that most homeowners will see a substantial increase values in their homes. It all comes down to whether you believe that housing price increases can continue to exceed inflation/wages over the relevant period. The scheme worked for my parents, so I should do the same thing, right?

  • don says:

    For those of you who bought in 2006, I am sorry for the timing of your investment. I bought in Dec. 2008 at a time when most people would have thought it was crazy to buy a house…but we put over 20% down on a townhome, that was foreclosed on…so we got it for nearly 50% off of the purchase price in 2006…The mortgage including prop. taxes is $300 less than we were paying in rent, and it’s been appraised at $10k more than we bought it for…so I guess what I am saying is…buy when the market is at it’s LOWEST, buy less than you can afford, buy it knowing it is a place to live, not a quick money making scheme, buy with the intention of living in it for more than 5 years, buy with enough money and credit to get a good loan at payments you can afford, and do your homework on the neighborhood – seek a location that isn’t going to tank and never rebound, or rebound so slowly that you can’t get out of it without a loss due to growth in family, job loss, or extended commutes.

    We fully intend to buy another house in the next 3-5 years, we will rent out the house we own now for more than the mortgage and prop taxes and HOA and use the difference to help pay for the new house…that folks is investing 101.

  • Soan says:

    I think that the loss of money in changing a house in three years is a good point.
    But it may well be a good deal if the price of current house has increased exponentially.
    But again, if your current home’s price has increased exponentially, you cannot assume that the price of the new house that you want to buy is less either.

  • Jack says:

    Many of us pay cash, so why wasn’t that option discussed???

  • Al says:

    My break-even period of buying vs. renting was 4.3 years. There are a ton of assumptions built in. This article does not reflect the details of calculating that 5 year break-even period. For instance, buying is only better than renting when your home is appreciating. Otherwise, you’re better off renting and investing the difference (mortgage+property tax – rent for equivalent property) in a portfolio. The major component that makes buying attractive is possible appreciation on a leveraged asset.

  • Asha says:

    I bought my first home when I was 23, I consulted everyone I could before looking for a house. I was not and am not now fabulously wealthy so buying a house was a huge investment especially seeing as how my last huge investment (college) didn’t really pay off (thanks recession!). My dad went with me to see every house I looked at and in the end I bought a fixer upper not because anybody else told me I should but because I loved the house from the second I walked in and it was in pretty good shape. The walls need patched and we had to replace the appliance BUT my mortgage payment is $200/month and I’m planning to have the house paid off in 10 or 15 years instead of 30. I live in a decent neighborhood and good school district. It took me a few months to find a house I wanted but patience worked out GREAT for me in the end. As my favorite college professor used to say, “Make smart choices not quick ones. “

    • James M says:

      Location is everything. Where in the world do you have a $200/mo mortgage? On what kind of property? How much did you put down? I’m guessing that’s a $30K property or so.

  • Dave says:

    My family was fortunate to buy a condo in 1998 and sell/buy 3 homes after that as we moved and our needs changed. That was all possible because of the easy credit market and rising home prices. In each case, we intended to own the home longer but then our needs changed and we were fortunate to generally come out well so that we still had enough cash to put over 25% down on what we hope is the final house until kids go to college in 10-15 years.

    In our most recent move, we sold first and then rented for 15 months while we looked for a house. I highly recommend people do not rush into buying a home–as a renter you have so much more power than the person who is trying to sell in this market so you can buy something else. As a renter with savings, you have so much more freedom and so much power. If you have a 20% in the bank saved up for a house and you lose your job…no problem. If you just bought a house…big problem. We sold one house late–carrying two mortgages for 4 months–NEVER AGAIN! I think the marketplace has changed radically and permanently–so you should not buy a house expecting it to be a stepping stone. Rent in the neighborhood you think you want to buy and have patience. Learn what really matters.

    Even with 25% down and perfect credit, we had to be on top of our bank and underwriter constantly to avoid the loan falling through. After we moved in, we learned that the people who sold to us DID have their purchase fall through and had to live with relatives, their three young children, and a u-haul full of their stuff for 6 weeks until they could get a loan. Now is not a time to think you can be hopping around from house to house, “upgrading” or whatever. It is worthwhile to hold out for the perfect house and rent until you can afford it.

  • Aaron says:

    Watch out for Real Estate “agents” or “Realtors”. They’re only looking out for themselves (family, friend or not) and will sell you down the river to make a buck. It’s much better to hire an attorney at a fixed rate to handle all real estate transactions.

  • Swahls says:

    When I buy a house, I like the rent to pay for the house in five years preferably, although occasionally I will pay more if I like the house. I don’t need to include insurance or taxes in these figures and I don’t include interest on loans. This has worked well for me.

    • Jeff Henster says:

      Swahls
      I don’t see how this works. Texas prices (where I happen to live), for a reasonably comfortable home in a low-crime neighborhood, is about $1/sq. ft to rent per month. (this includes the taxes, insurance, upkeep and profit; in USA, where we include kitchen, bathrooms, etc in the square footage). So, that comes to something less than $12/sq. ft. per year, or $60/sq.ft. under the five year pay-for-itself scenario. (no time value of money)

      An equivalent house here to own is about $95/sq.ft. So, rent paying it off doesn’t even come close; taking only the principal part of it that you implied, amounts to even less . The only the way this would work is if you found some incredible bargain (that didn’t need a bunch of repairs and merited the rent you charged). Unless of course you own cheap shacks and are able to charge outrageous rents for them, but I don’t think you’re doing that. I guess the type of house I used in the example would just not be a suitable investment under your approach, but I can’t think of anywhere around here that would, and we have relatively cheap housing here in Houston.

      Texas is one of the few places that didn’t go insane over the housing bubble, but I suspect the ratio of rent per sq.ft. per month to price per sq ft is similar elsewhere, including where you live. However, it does look like rents may be going up now relative to real estate prices, especially with 20% downs and the like becoming more commonplace. I like to look at it more as return on capital, compared to alternative investments of the money, which is a longer term view, but I appreciate, given all the volatility in home prices, how one would prefer to make it financially pay back in five years or less, instead.

      • James M says:

        Texas is a very big place. I own some property in Texas that I couldn’t, if I had to, sell. I have 80 acres of arable land with water and a private road that might go on the order of $4500/acre if I really tried hard to get a buyer. I’m not into that. I have a 2 bedroom house that might get $30K, again if I put a lot of effort (money) into it. I live an work in the land of $160/sqft real estate so these numbers don’t do a thing for me. On the other hand, places where I’d actually like to live in Texas are nowhere near affordable to me. If I live to retirement age or whatever and am facing any kind of hardship or poverty, I’m quite sure I’ll be happy to put a trailer on my land. But until then I want to not only live in a city, I want to live in a functional city with character, close to its cultural center (e.g., close enough to walk!), and not in any kind of apartment, condo, high rise, or beehive. That turns out to be *expensive* no matter what. For a Texas example of what I want, how about a single family detached house with a yard big enough for 2 German Shepherds, but walking/bicycle distance from Zilker Park in Austin? That’s not something you’ll find for rent at any price, and probably upwards of $500K even now.

  • DC says:

    I do not think this 5 year rule is relevant anymore. With the market changing and banks not lending like before and many of us unable to refinance or move, we are stuck paying 6.5% on properties that are not worth anywhere near what they were 4.5 years ago and HOA fees, Home Insurance, utility bills,property taxes, mortgage insurance and childcare taking the rest of our money. Paying $2600/month for mortgage for a house vs. renting an apartment in MD for $1500/month seems so crazy now. I do not see any point at which the market will change and our payments will improve. Interest rates are so low now but if you already in the house you cannot get those rates. Only new buyers can get them. Seems we are doomed to paying until we can’t pay anymore then foreclosure since banks/lenders are not willing to work with you to allow you to stay in your home even though they know it is worth far less than what you paid for it before the housing market crash.

  • CJ says:

    I agree with houseregrets. I purchased a one-bedroom townhome in Aurora, CO in 2001, with a fixed rate FHA loan. At the time I had what I thought was a safe, stable job. That was two recessions ago. Now, even though I’ve been faithfully paying on this mortgage for ten years, I have zero equity. The market value for attached housing in the neighborhood has gone south and I owe more on the townhome than the place is actually worth, even with all of the upgrades I made to the place (new bath and kitchen, new furnace, new flooring, new appliances) over the years. It proved unsellable as of 2006 and sat empty for a year while I and my new husband hoped the market would recover. It never did and I doubt it ever will. I’ve kept it rented out, but due to the high number of rentals in the area, the amount of money I can collect in rent won’t cover the cost of the mortgage and the HOA fees (which have steadily risen over the last five years). I wish I’d never purchased the place. There are times I have dreams where I torch my property and dance around with a gas can and a pack of matches just to make the stress of having to keep this place up and the payments made to the snakes at BoA go away. To make matters worse, my company decided to lay off everyone this year and send all of the work my team used to do to the Philippines. We will NEVER have any kind of housing recovery, no new homebuyers and no way out of this mess until those who would be first-time-homebuyers have jobs with which to pay a mortgage. Unless we stop shipping all of our work overseas to the slave labor in Asia, there will be no end to the ongoing housing mess.

    • Jeff Henster says:

      CJ
      Your case has happened so often, it’s just a shame. But I do remember the Eighties and Nineties how we were almost universally exuberant over our new “Service” economy, which presumed to forever flourish while eventually not producing anything tangible (well, except perhaps military armament). Our big “export” would be financial services–who in their right mind is buying financial services from us now? In the meantime we kow-towed to whatever Business said was good for us, even though business people tend to be pretty ignorant otherwise– I have found worship of Business a particular infection of our national mind-set going way back to the 1700s. The idea that was popularized by both the government and business of using the place you live in as an investment was particularly stupid–why not treat your family and friends the same way? Why does everything in life here have to involve a profit? You can’t even look at a city bus without seeing advertising all over it anymore!

      Anyway my sympathy, and I hope you find some livable niche in the new economic reality we find ourselves in. It’s not changing any time soon.

    • James M says:

      But you’ve lived in a place that many people regard as paradise on Earth. I’d love to live in Colorado, even to be relatively poor there. I don’t even find opportunities that qualify for that!

      • COskibum says:

        Aurora, Colorado is not a desirable place to live. It is on flat land with no view of the mountains. It is the same as living in a suburb of Omaha.

  • houseregrets says:

    You might want to take into account the millions of people like us who bought are little starter home back in 2006 (just to get in the market– advice was to get in and build equity to sell for a bigger home). We didn’t buy at the top of what we were told we could afford, and we chose a 30 year fixed mortgage, not being persuaded into an adjustable rate. Now, two kids later, 5 years later, our house is worth $100,000+ less than what we paid, we have way outgrown this starter home. With 2 stable incomes, we aren’t approved to do a short sale and just have to live with the situation. With forecasts that the bottom hasn’t yet hit and might not for a few more years, you might want to adjust this advice to say it’s a 10+ year rule.

    • Also bought in '06 says:

      I agree with houseregrets. We bought a modest starter home in early 2006, snagging a 3 bedroom, 1500 square foot Cape in a quiet neighborhood. Rather than doing stupid things with balloon or interest-only junk loans or maximizing our borrowing power, we calculated a comfortable payment and worked backwards to figure out our max house price. We have a 30 year fixed rate loan and got a wonderful rate. The assumption we made was that we would likely sell and move up to a bigger/better house in 5-7 years.

      5 years later, comps in our town have nosedived in value. If we had to sell today, we would be lucky to get what we owe on the house (and it would take 6-12 months to sell, assuming it did). After realtors’ commissions and closing costs we’d walk away owing money. So paying our mortgage faithfully and on time for 5.5 years has gotten us zero equity, and in fact we have essentially “lost” the tens of thousands of dollars we put down on the house and have invested into improvements.

      Part of me wishes we hadn’t been smart – that we had maxed out our borrowing power with the fixed-rate loan. At least then we would have had a bigger house better-suited to a growing family (we had a baby a year ago). With two good, stable incomes we could afford a much bigger and nicer house for a bit more than we paid for this place but we just can’t afford to sell, and even if we could we’d have no equity to show for it in order to buy the next house. We decided that we’re just going to keep fixing up the house and making upgrades/improvements that make us happy, in the hopes of at least enjoying our home. A house to us is merely a place to live; anyone viewing it as an investment these days is insane. Why make extra payments to the principal of the loan when values keep dropping – it’s not really going to get us a damned thing in terms of equity?

      Thanks to the big banks and to all the irresponsible borrowers for screwing over those of us who were careful and smart. There’s all sorts of help for people and entities who were stupid and meanwhile a lot of homeowners in our shoes are still paying for the mistakes of others and will continue to do so for a long time to come.

      • Jack says:

        I can’t agree with your statement more. I purchased a townhouse in 2006 and it’s dropped almost 50% in value. Paying extra on the principle is a worthless idea. But, I can still afford to make my house payment. So here I sit, with a ridiculous amount of negative equity while other people who overstretched their credit are getting foreclosed on. Bad lenders, horrible borrowers, people flipping ridiculous houses, and greedy builders all ruined the housing market and now the little guy is the one paying the price.

      • Tzingca says:

        We are an older couple who purchased our first “starter” home in 1982 on a 25 year mortgage when interest rates were 18.5%. Housing prices were ridiculously high on top of the insane interest rates. Desperate to get into the market and grab anything, we purchased the best we could afford at the time, and immediately lost 25% of the value of the property within 6 months of buying due to a housing crash. Even our real estate agent advised us to walk away and let the bank take the house.

        Since walking went totally against our principles, we decided that the only ways we were going to win was was to pay it off as quickly as we could. We made a concerted effort to pay off the house. We made a chart on the wall and the whole family got involved with finding ways to find extra money to pay off the house. We sacrificed a lot, no doubt about that (we even made a wish box that everyone wrote down their burning desires for once we got the house paid off) and found creative ways to entertain ourselves that didn’t involve spending money. It took us 6 years almost exactly, and we had paid twice the original purchase price in that time. (If we’d stuck with our original 25 year mortgage, we’d have paid 4X the original purchase price).

        Once the house was paid for, we spent some money getting it fixed up to sell and once we’d added some things like a deck that made the house more attractive to us, we were reluctant to get back into another oppressive mortgage so we stayed.

        30 years later, we are still in our starter house and it is worth 5X our purchase price. Getting out from under a mortgage early in our lives gave us financial freedom and options that other families didn’t have. We have since purchased 2 more revenue properties and we contribute the maximum allowable to our registered retirement fund.

        The best thing that ever happened to us was for the housing market to crash, because that started a mindset that we have practised the rest of our lives. We never carry a balance on our credit cards and because debt of any kind makes us nervous, we make spending decisions that keeps us out of debt which means for one thing, we rarely buy new. Paying down the principal as quickly as you can is the ONLY worthwhile idea, as it gives you back the money you would have otherwise paid in interest.

        As with anything you own, the price that its worth is only what you will get on the day you sell it.

        • PZ says:

          This is a great story, thanks for sharing! I agree with your principals as well, always pay down debt ASAP, you will be happy and sleep every night without issue. I have not bought yet but with the cash I have saved up because I never went into debt I do plan to buy, once I decide where I’d like to live, and pay in cash.

          • Richard says:

            My wife and I bought our house 10 years ago, we didn’t spend more than we could pay, and after 5 yrs. took a second to do some up-grades and build a pole building on the property for me to start my business..However now we are both on disability, with a limited income of less than 50% of what we had been making.. This is through no fault of our own, by the way.. Our home is worth far less than we owe on it, and with our income loss, we can’t go any place else.. Thanks to the failed housing market, we don’t have investment growth, and no longer have a positive cash flow.. We can’t run, or walk away, and we can’t afford rent, so how did we screw up.? I don’t see this as our fault.! And for the record, we have never been late, nor have we ever missed or skiped a payment, and our lender will NOT give us a re-fi because we lost so much of our income… So where is our “Bail-Out”.??

        • SDF says:

          Your story really resonates with us. We’ve been buying and selling residential real estate for forty years through numerous economic cycles. We grew up in Texas where the oil bust meltdown in the 70’s crashed home prices even as interest rates were at times double digits. We always bought within our means and tried to make extra payments on principal. Though we didn’t make any money on our real estate the first twenty years, we always enjoyed our homes and sold them easily as we bought well and maintained and improved them. Since the early 90’s we’ve been buying in beautiful areas out West in Arizona and Lake Tahoe. We made big money in residential real estate until 2006 and own two homes, not large but both on the water (always good to mitigate downswings and increase appreciation.) We had mortgages but paid them off as soon as possible. Since 2006 the declines in value have probably erased the gains we experienced the last twenty years but we own two very nice properties free and clear. We’ll wait out this cycle and only sell when we think the time is right, if ever. This is a cycle, though a severe one at a national level, not dissimilar to what we experienced at a local level in Texas years ago. Some of these cycles take many years to come out of so it is likely that appreciation will be muted once the bottom in prices finally achieved, but real estate appreciation will vary widely across the country. The lesson for Americans is in history where the country and global economies have experienced boom bust cycles numerous times, usually about every 20 to 40 years. Cycles are part of human nature as people bet on the future and the economy overshoots and corrects. One other point we would make is that people should consider how they invest their money outside real estate. We lost money in various assets like oil and gas partnerships, the stock market, etc. this was despite an effort to understand these investments. However, we’ve been pleased with our muni bond ladder which has delivered the equivalent of 8% pretax over the past 9 years. It’s important that everyone understand various asset classes and invest in things that fit their risk tolerance. There will be various threats to every asset class. Finding investments you can understand and stick with is an important tactic to enable you to sleep well and make money. During the last crash our munis were down 3% at the bottom and we’re now up 12% plus after tax income of 5% annually we’ve gained each year. The lesson we’ve learned is that it can be difficult to make money but patience and hard work (and saving 20 to 30% of your earned income so you can invest) all add up to progress over the long haul.

      • Walk Away says:

        Everyone complaining about their house losing value all the time is extremely annoying. If you don’t like it, walk away. Nobody is holding a gun to your head. People buy houses as investments. Period! If you make a bad investment do you stick around in it because you told them you would? Only if you want to be in financial ruin and someone who buys “Starter home” is looking to make money, not live there until its paid off. They want to live there for the 5 years or less like this guy is talking about and turn around and make a profit. Our system failed because it was set up so that “everyone” can buy a home. That should not be the case….only select few should be able to buy homes. There should be stricter underwriting guidelines that do not allow these risky loans to people who don’t qualify.

        Also, if people are worried about their credit taking a hit….that is completely bogus. I foreclosed on 2 houses less than 2 years ago and my credit score is still 720+. Just bought 2 new cars and my rates are 1-2%. Walk away now and enjoy financial freedom as well as piece of mind. I had the moral issue of I took this mortgage and I have to pay it off, but at the end of the day its not a moral issue….Its a financial one.

        • GENLA says:

          Walkaway: For many people (including myself) who are underwater the prospect of walking away is a real alternative. For folk reading this comment line, though, you should check your state laws to see if you are in a recourse or non-recourse state. In a non-recourse state part of the deal is that the lender only has the house as security for the loan. If you walk away they cannot come after you for any deficiency. HOWEVER, that only applies to original purchase money mortgages. If you refinance it converts your loan into a recourse loan and they can come after you for the deficiency.

        • BigFrank says:

          If your home loses value, but you’re still employed and can still make the payments, then you have a legal and ethical obligation to make your payments. Otherwise, you’re a scumbag.

          • Annette says:

            I agree, Big Frank(except for maybe the “scumbag” reference). This attitude of “walk away and let someone else clean up your mess/ pay your debt” is also what has gotten us into the financial wreck we are in. Folks who walk away are kidding themselves if they think it is only the banks will absorb their default (or worse- perhaps like an infant they are “takers” only thinking of themselves). Come on people!! -Time to man/ woman up, & do the right thing – not necessarily what is easiest ….. If it is at ALL possible – (not expedient ) take care of your own house & clean up your own messes. Where is your pride & self worth? If the only work available is cleaning toilets- then let’s get to work… We do what we have to do. Survivalists are always going to float . People with their hand out are going to look to others to blame or demand that others “share” . It’s the classic Little Red Hen scenario. There is joy in working really hard and being a good steward; in sharing with those who are less fortunate. But, irresponsibility does not inspire giving. I cannot imagine being a moocher is all that gratifying and I imagine for some these days, bad habits are (becoming?) chronic…..(sooo many “bail me out” opportunities) It’s tough love time folks …. otherwise surely it will be to the demise of us all (unless, that is the idea) However, I don’t know about you , but I will not go quietly into the night , nor will I buy into some flawed idea that “everyone else is doing it” or somebody owes me(we can all trade sad stories) . I like my autonomy and self- sufficiency way too much and I am certain God didn’t design too many of us to be dependent wimps .

          • Al says:

            Agree.
            You are under water on your car loan before you leave the dealership. You still make those payments, don’t you?
            Treat your mortgage the same way.

          • BigLoser says:

            So, did Lehman-Bros. have an ethical obligation to pay for its bad investments? I didn’t see it stopping them. Walking away from a contract is a business decision. The bank makes its money up front in interest and fees. A $200k house that lost half its value over the last five years already has accumulated on the order of $60k in interest, not including fees, and the bank assumes the property – that it had appraised at the original sale – and can resell it at current market value meanwhile the debtor walks away with no equity, plus a deficiency judgment they still have to pay more to the bank.

            If you make business decisions based on some “loyalty” you have to a bank, the same ones that thought making these loans was a good idea in the first place, you’re a sucker.

            Not to mention its the inability of people to move to find employment that is part of whats keeping the entire economy down. The quickest way to recover is to write down these bad investments, get the pain over with, and start being productive.

          • Jay Howard says:

            I think the financial minds that invented CDO’s as a new profit center are scumbags, but SO WHAT? They don’t care, and they shouldn’t care. Just like your opinion shouldn’t matter to people for whom walking away makes sense.

      • Jim says:

        People, don’t buy your home as a step-up investment mechanism. If that is what you are doing, you are definitely not smart. If you want to speculate in real estate which is NOT your primary home, that’s a little more palatable. Because of the vagaries of the market, you always need to be prepared for a downturn. What is the easiest way? Own the home as soon as you can…

    • Darren says:

      I’m going into year 8, and you are right. 10 years is more accurate. Wells Fargo was willing to give me up$700K, but I took half. In NJ, most municipalities did property reevaluations, and as result properties lost value. I did lose about $20K in value, but I have friends who lost 3-4 times more. It seems like the biggerhouse you bought, the more you lost. When I bought my house, it was just me and my wife. Now it’s us and 2 kids, and we are busting at the seams. But the world has changed. When I bought my house in ’04, we were on a 5 year plan. 3 1/2 years into the 5 year plan, and the economy took a dump. So my 5 year plan is at least a 10 year plan. I lookk at the flip side; if I had to find a 3 bedroom apartment, I would be spending AT LEAST what I am spending in mortage, but I imagaine I would be spending a lot more. I treat my house as an asset. If I can see for a profit, I will. if not I’ll keep paying rent to the bank. At least I know in 15 years I’ll only have to pay the taxes. Flipping houses was a good way to make cash a few years back, but that, for all intents and purposes, is over for the average person.

  • kathy says:

    Dear Lizzie, all other things being equal, yes.

    • Lizzie Negron says:

      Kathy,

      Can you please explain?? I was under the impression that generally, although so many people do it especially nowadays, refinancing is a “bad thing”. Would I take a hit on my taxes because of it? Will it have a negative impact when I choose to sell, if ever!, my house?

      I am lying if I say that paying at 6.5% hasn’t been a struggle and the offers have not been tempting but like I said before, I really don’t want this to affect me and my family in a negative way in the future.

  • rc says:

    The 5-year rule is relevant only in markets where properties appreciate at a modest, predictable rate. Article needs more focus on impact of appreciation or depreciation, not so much on mortgage principal and closing costs.

  • Lizzie Negron says:

    “…the higher the interest rate, the less of the principal you’ll have paid off after 5 years…”

    I bought my house in 2007 at a 6.5% rate (my house costs $325,000). I have gotten offers for Wells Fargo’s “3-step refinance program” where they would offer a lower rate with no closing costs involved (obviously the rate won’t be as low as what’s in the market but I guess that’s how Wells Fargo makes their money).

    I haven’t taken the offer because I’m too chicken to refinance. But in reading your posts, I am having doubts. I don’ understand too much about these things – am I a fool for not taking advantage of the no closing cost offer and getting a lower rate??

    • David Vigil says:

      Lizzie –
      When something sounds too good to be true, it usually is. You must check out the full terms of the offer and determine whether the end cost is worth it. In most refinances, there are costs associated with the transaction – the old loan must be paid-off and the old mortgage released (a cost), the new loan usually has fees and costs (recording the new mortgage, at least, and, most often, application fees, underwriting fees, etc., which may amount to nthousands of dollars). Of course, at a lower interest rate, your monthly payment on the same amount of loan (be sure that new fees and costs aren’t rolled into your new loan) will be lower. Your monthly savings in the reduced payment divided into your costs in getting the new loan will tell you how long it will take you to break even and then begin to save over your existing loan. For example, if your cost of the new loan (fees, etc.) is $5,000 and your new monthly payment is $100/mo. less than your current payment, it will take you 50 months to recover the cost of getting the new loan and then begin saving over the old loan. Also, don’t forget to check out the total amount that you will pay over the entire term (length) of the loan and compare that to what you will pay over the remaining term of your existing loan. If you have a 30-year loan now and have been paying on it for ten years, the amortization schedule that you got when you took out the loan will tell you what your total remaining cost of payments will be – an new amortization schedule on your prospective new loan will tell you teh total cost of the payments on that loan. BE CAREFUL AND ALERT!

      • Andy Freeman says:

        > In most refinances, there are costs associated with the transaction
        > if your cost of the new loan (fees, etc.) is $5,000

        You’re not reading what he wrote. Wells Fargo is offering him a $0 cost refinance with no fees, points, etc. (They did it for me twice.) That said, he’s right in thinking that he could probably get a lower interest rate by refinancing with another lender. (WF isn’t being nice – they’re making the offer because they’re pretty sure that he could do better.) However, refinancing with another lender requires far more work than the WF deal requires. If he is going to do that work, great. If he’s not, the WF offer is better than doing nothing.

        > Also, don’t forget to check out the total amount that you will pay over the entire term (length) of the loan and compare that to what you will pay over the remaining term of your existing loan.

        You’re assuming that he’s going to pay on a 30 year schedule but he probably shouldn’t.

        If he’s got 20 years left on his current loan, he can pay his new 30 year loan on a 20 year schedule and pay less each month than he’s paying now (because the interest rate is lower), saving significant money. (If he continues to pay what he’s paying now, he’ll be done with the new loan in a lot less than 20 years and save even more.) Since the 20 year plan has higher payments than the minimum for his new 30 year mortgage, he’ll also have the flexibility to drop to the latter if he needs to. (This flexibility is one reason to prefer a 30 year loan over a 20 year loan even if you plan to pay in 20 years.)

      • Darren says:

        I did the free refi with Wells Fargo, from a 30 year to a 15 year. I’ve been in my place for almost 8 years, and I was able to bring down my rate from 5.3% to 4.3%. The only thing you want to remember to do is keep making the mortgage payment. Wells will advise you to skip a payment while they close out your old account and do the new one. Don’t skip a payment, because your new loan balance will be based on payments collected. Missing a payment could jack up your monthly payment, especially if your mortgage, taxes and insurance are all bundled. Outside of that, the process is easy.

    • Icarus says:

      Lizzie, it kinda depends on what your goal is. Since you’ve been in your house for at least 4 years, your monthly payment is paying a bigger chunk of principal along with interest. When you refi, your loan resets and you start the cycle of paying more interest to principal again though hopefully at a lower overall payment which saves you money.

      If you plan to live in your home long enough to make back the closing costs (there will be something either out of pocket or rolled back into the refi even i those no closing cost offers) then it probably makes sense to refi. If you plan to sell within a year or two, it might make more sense to not refi and instead make bigger payments to bring down that principal so that you have more flexibility with your selling price.

      Disclaimer: Your Mileage May Vary.

    • Mark says:

      I used to work for Wells – The three step program is the best program I have ever seen. If you can get less term with less payment – it is a no brainer because there are no costs added to your balance. A typical refinance has some closing costs that are rolled into the loan – the three step does not. It also does not require an appraisal, income and assets documentation (in most cases), and the paper work is sent to your home. Once again if you can borrow the same amount of money with less payment for less time – jump on the three step.

      • Darren says:

        I agree. It was the simpliest thing I’ve done as a homeowner. Picking paint colors was more stressful than the refi…

    • Glendora Greenway says:

      I took the deal from Wells Fargo. All was done over the phone and in the mail. Very easy and I got a lower interest rate. No closing costs either. Not sure why you would not take the deal.

    • Adam says:

      I too did the 3 step refinance. It is not a scam, it is the best deal you will find anywhere. I did it 3 years ago and it was very easy, I even had a 2nd mortgage with another company. I tried to do it again recently, and since the last time they have tightened their policy, you can’t have a 2nd mortgage with another lender anymore to qualify.

    • Mary says:

      Lizzie, You are likely being duped by Wells Fargo. I have reviewed a number
      of these loan offers from WF for clients and they continue to be abusive. WF implies that they are doing this out of the kindness of their hearts, but look at the last couple of pages of the loan offer. It is very cleverly hidden between the lines that you will actually be paying nearly 10% of your mortgage balance in closing costs. It is not that you avoid paying refi costs, it is that you don’t have to pay them “out of pocket”. They merely add the costs to your mortgage balance, but don’t disclose that fact until you are fully enrolled in the mortgage. Beware. Employ critical thinking….when did WF ever do anything for you and why WOULD they offer to lower rates without a direct payoff to their bottom line?
      They wouldn’t. They calculate that you will be more likely to do business with your existing lender and will be lulled into believing that they are being good guys.

      • Andy Freeman says:

        > They merely add the costs to your mortgage balance, but don’t disclose that fact until you are fully enrolled in the mortgage.

        As I wrote above, I’ve done two of these with Wells Fargo. They didn’t add anything to my mortgage balance. (I’m an obsessive type who tracks this stuff in quicken each month.)

        The interest rate that they offered was higher than I saw advertised at that time, so I’m willing to assume that I could have gotten a better interest rate, but that would have required more work.

        • Darren says:

          My balance was the same. No closing costs, no appraisals. I pay my mortgage on line, so I constantly check mortgage balances and escrow balances. If I see anything funny, I call right away. So far so good.

  • Josh says:

    It seems like this doesn’t take into account the tax savings you get while you’re paying that mortgage interest.

    • jc says:

      i agree. PEOPLE need to understand, they can deduct the INterest on the Mortgage or Home as long as they have lived in the Home 3 out of the “last” 5 years. This is where the 5 year rule applies.

      • Tom says:

        You are confusing the rule. the 3/5 rule is meant to establish primary residence only. It is not true that you have to wait three years (and thus be at three out of five) when it comes to deducting interest payments on taxes.

        The fact is for most consumers a mortgage is their biggest tax shelter. It is also a form of equity (well, normally).

        I am not saying it is a bad thing to be in a house 5 years, but if you are looking at the financial side of moving or deciding between renting and buying, the tax shelter is a HUGE factor.

    • PZ says:

      Not everybody qualifies for the mortgage interest tax deduction depending on the amount of money they make, and if your mortgage is not that big you might be better off taking standard deductions. In fact I think this deduction is a bunch of crap because you are basically getting what, 25% of the interest back? Why even pay interest, just save your money and rent until you can pay cash or save enough to put down a nice deposit on the house, like 30 or 40 %. JMO, everyone is different but I think the tax deduction is a farce.

      • Joe S says:

        Well I itemized and get not only the interest rate deduction but also the local property tax deducted and that effectively almost doubles the deduction at my current tax table rate. I actually keep a small mortgage which I could pay off but have found that I can invest the cash it in municipal bonds (no taxes) and collect almost 6% interest tax free.

        • JJ says:

          Gotta agree with Joe. There are more advantages than just the mortgage interest deduction.

          • Bud says:

            I think the ‘free market’ probably accounts for the value of the mortgage-interest deduction (et al) by increasing prices. After all, with the tax benefit, you and all the other buyers will have a little more money available for the purchase price. The market doesn’t really care where the money comes from.

  • david crandall says:

    But there are eople who bought houses for $600,000 and 5 years later they are worth $300,000 . I dont think they would agree with the 5 year rule. If you sell for more, it’s dumb luck.

    • Swahls says:

      Those people were duped the houses were never worth what they paid for them. Buy a house you can payoff in five years.

  • jc says:

    Hey, don’t hope to make money on real estate big time. I think people should buy a house they can well afford and pay down the house in no more than 5 yrs…if you have the money and need to have a place to live, buy now stay as long as possible and sell it when you don’t need it any more. you might beat the inflation.

  • Greg McFarlane says:

    How are you defining the 5-year rule? Are you saying that if I were to buy a house now, and sell it 4 years and 11 months later, I probably shouldn’t because for what I’d lose in closing costs both now and then, I might as well rent?

    The average 30-year fixed mortgage goes for around 4.55% right now. So after 5 years, you’d have paid down about 9.8% of your principal. (Obviously, the higher the interest rate, the less of the principal you’ll have paid off after 5 years: that principal balance would dwindle to less than 7% should interest rates rise to 6%.)

    I like where you’re going here, I think. I’m just not sure I understand it.

    • MoneyNing says:

      If the real estate trend goes up over time, buying will become more favorable the longer you hold the properly because rents generally go up every year.

      However, as you can see from the formula I outlined, you are basically guessing at the selling price to come up with a decision. What the 5 year rule is essentially saying is that if you won’t even live in your home for at least that amount of time, you shouldn’t be even thinking about buying because it will be extremely difficult to recover all that costs associated with a home purchase.

      • ZigZag says:

        I can see what you’re getting at regarding renting, and I assume you’re a landlord yourself. As a former renter I was seeing a lot of people following this trend, and so did my apartment complex. They continued to increase the rent annually until I was paying as much for a tiny 1 bdrm apt as I do now for a mortgage on a 4bdrm house on an acre. My quality of life has increased and my monthly payment is the same.

        Landlords are well aware of the falling prices and people’s tendency to want to rent until we hit bottom. In the meantime renters are paying more because no matter how much landlords raise the rent people are anxious to pay it because of their fear of buying a sinking investment. Your formula used to work, but we live in a different world today. Generally I try to zig when everyone else is zagging.

        • MoneyNing says:

          There may be some that do this but many landlords don’t raise rents simply because they think they can get away with it. Everyone wants to make more money naturally, but rents are “in general” dictated by supply and demand.

          It’s great that you are able to buy a property and at the same time not pay more. For some, this low interest rate environment is really a blessing.

        • billy will nill says:

          a bigger house with the same payment as your old 1 bed apart is still costing you more…more stuff to buy to put in it, more utilities, more everything

          I raise my rents mostly due to the prop tax increases each year, but latley they have been dropping

          • Pat says:

            Thanks for being honest about property taxes. People need to realize that landlords have a right to make an honest living. I tried it, but was never any good at picking tenants – too soft of a heart; I believed every sob story. BTW, did you lower rates when taxes went down or look at as compensation for years when you were not able to charge what your units were worth?

      • AJ says:

        MoneyNing,

        Thank you for writing this article. I especially like the explanation for new buyers about why the interest goes down as the principal goes up while the payments remain the same.

        I have one minor suggestion. You wrote “But if you’re buying just on the basis of what the bank says that you can afford and you don’t want to think about it, stay in the rentals until you’re ready to spend at least five years in the same home.” I suggest you reword it to read ” But if you’re buying just on the basis of what the bank says that you can afford and you don’t want to think about it, stay in the rentals.” Period. 😉

        Not once have I seen a pre-approval show a reasonable amount, it’s always disregarding spending on anything other than a house and food; no retirement savings, no emergency fund, no room for any of life’s little unforeseen financial hiccups.

    • Joe says:

      The realtors want you to wait 5 years so the equity you got from principle reduction will cover their commission and selling costs (6-8%).

  • Hunter says:

    Good Information. My real estate agent recommends a 7 year turn-around minimum. We’ll be moving next year, after being in this house for 4. The landlord option is the best choice for us, I believe.

  • Justin says:

    “When I first considered buying a house, my entire family got involved.”

    Unfortunately I started the same way and ended up regretting it. I was gently pressured into buying my uncle’s house it was a “good deal” and a “smart investment” even though it was out in the suburbs (I’m a city guy by nature).

    After about 3 years I broke up with the girl I bought it with (bad bad bad idea to buy a house with somebody you’re not married to) and then held onto the house for probably another 3 if I recall correctly. Luckily I sold it right at the end of ’08 before the market crash and I made a little money, so the five year rule (it was closer to 6 for me) isn’t a bad guideline, if I would have got out sooner I probably would have lost money.

    • TBL says:

      It can be a very bad idea to buy a house even with someone who happens to be your legal spouse. If you’d married your girlfriend, maybe you would have stayed together to honor the piece of paper, but maybe not. If you’d divorced rather than merely “broke up,” you still would have had to figure out who was taking responsibility for the house.

  • Lynn says:

    Timely advice, thank you.

    • armin.baur says:

      The five year rule may have been OK before we got into the real estate mess. Untyil that happend, houses appreciatd year over year and buying a Condo or Town house for a few years and then sell it for a profit worked. Not today. Prices for single family homes in moste regions are still falling and will continue to fall becasue houses are still way over priced. Places like Washington DC are exceptions as long as the Gov hires. WHen the Gov starts laying off people, that area too will fall. Buying a house at a time when home prices are falling is insane because we are in finacial mess like never before. You cannot apply rules now which worked before Wall Street and Banks screwed the American citicens. What if Oncle Sam defaults on its debt? What if interest rates go up to double digits again, can you still pay the mortgage. About 1/3 of housing mortgages are greater than the value of the house they cover. What if more and more people just walk away from the mortgage. This is a new trend, walk and don’t look back. Americans buy homes as an investment but now, a house or real estate is no longer a good place to invest. May be in 25 years ? no body knows and that is the truth. The best advice right now is rent a place until the USA is back on its feet again.

      • kaiser roll says:

        Actually rents are increasing more rapidly now in many markets. and the difference between rent rates and a mortgage payment including tax and insurance is getting smaller and smaller. economics states as demand for renting increases, so will prices to rent. homes are becoming more and more expensive to build in the future due to lack of available land near city centers and cost of materials increasing. the bubble popped on housing, prices are correct now.

        • PZ says:

          no, houses are still too expensive, and with foreclosures on the rise this winter all homeowners will feel that pain. If they are waiting for higher prices they will need to wait 18 months at least. By then, whats the point of waiting? I would recommend that people deal with the reality that a house is not really an investment, rather, its a place to live. I have rented the same place for 10+ years and pay $500 a month, never more. The landlord loves me and never wants me to leave. I have over 200k in cash now saved up, when I get to 250k I’m going to buy a foreclosure for cash. That way I won’t have to pay 1 penny of interest, what a waste of cash… interest. I should have 250k in about 13 months if all goes as planned, I’m thinking I will be able to buy a foreclosure for about 150k tops in a decent Denver neighborhood. Banks luv the cash if they can get it for a property thats underwater/nonpayment for 12+ months…

          • ReallyPZ says:

            Really PZ?

            So over the past 10 years, you’ve given your landlord $60,000 in rent. You’re going to pay another $6,500 in rent while you make your next $50k in savings. And then you’re out and off to buy that house scott free, no interest. Of course, if you bought it today, took a $50,000 loan at 4.50% interest, and you paid it off in a year (which you claim to be in the financial state to do), you’d pay, what, less than $1,500 in interest. So if we call rent, lost money, and we also call interest, lost money, you’re paying your landlord, what, $5,000 extra to avoid ever paying a bank a dime of interest. Am I missing something here.

          • Jimbob says:

            A mortgage is a contract and definitely an investment. Your home is in fact a commodity like wheat, soybeans, oil ,etc. Just nobody looks at it that way. Purchase a home for the long haul, maintain it, be responsible and it’s all good.

          • macookie says:

            ReallyPZ are you envious of PZ because he has savings and didn’t buy a $300,000 home and watch it decrease in value to $150,000 and today… owe $500,000 because he used it as an ATM like millions of other?

          • John says:

            “I have over 200k in cash now saved up, when I get to 250k I’m going to buy a foreclosure for cash.”

            Why not save even more money by doing what your landlord is doing? Buy a double and rent out half of it.

            That way you can write off the taxes and upkeep and stay ahead of the game!

          • Jay says:

            BRAVO PZ.
            I wish I did what you are doing. As long as you are happy, then living below your means, and being able to afford restaurants, vacations, etc is absolutely the RIGHT way to go.
            People who thing you should buy a home aren’t factoring in things like maintenance costs, utilities, and the Evil that is Property Taxes.
            I live in a huge 6500 Sq Ft behemoth that I thought would be my dream home – turned out to be my nightmare… and I live in the most taxed county in the nation – I pay more than 19K per year JUST in taxes… UGH…

          • Nolan says:

            ReallyPZ – Yes, you are missing something. Actually at least three things: closing costs, homeowner’s insurance, and property taxes.

            First off, the bank does not give out a loan for free. There are fees to pay, some of which will be owed when PZ buys regardless of whether he takes a loan but others (like origination fee and lender’s title policy) that he only has to pay if he follows your plan. So-called “zero closing cost” loans get the equivalent of these fees by charging higher interest rates, so depending on someone’s credit they might not qualify for 4.5% with zero due at closing. Cost: ~$1000

            Second, PZ’s landlord currently insures the building he lives in. If he buys a year earlier that is one extra year he will have to pay to insure it himself. Cost: ~$2000

            Most importantly, PZ’s landlord currently pays the building’s property taxes. If he buys a year earlier that is one extra year he will have to pay those. I don’t know where PZ lives, but my property taxes are $3600 per year and my house is only $150,000. Cost” ~$7000

            So that is $10,000 in “lost money” which more than offsets the $6,500 he is paying his landlord. That’s not to say he shouldn’t buy, since maybe the home will appreciate and probably it is a bigger or better place to live than the apartment, but your argument is ridiculously simplistic.

          • Jeff says:

            To get a better handle on the numbers here….at 4.5% the interest would be closer to $1320 over the 13 months and that ignores that with $200k down he’d probably qualify for a rate under 4%, pretty close to 3%. At 3.5% he would approach $1000 for total interest, so let’s stop there and use 3.5%. Putting 80% down on a foreclosure and promising to pay off the rest in a year at 3.5% he could probably get the selling bank to eat the points and origination fee, but you are right there would be other closing costs for preparing the deed, and I expect taxes on the transer. Lets even raise those up [from the $1k you suggest ] to $1500, bringing us to $2500. Insurance is going to cost him as you say, but I pay $1,000 [not the $2k you suggest] on a 400k home; but let’s say Denver is a risky place to have a home and call it $1500, bringing the total to $4000. The Denver County website pegs property taxes at .53% of home value or $1325 per $250k not the $7k you suggest, bringing the total to $5325. So we come in below the $6500 in rent.

            There are also some federal tax implications….I am going to assume he makes $100k per year to be able to save $50k, and lets say he is single. The standard deduction is currently $5800. To the extent that he can cobble together deductions above that amount he will lower his taxable income and save the tax he would have otherwise paid. His marginal tax rate is probably 25% or 28% given my assumptions, but let’s use 25%. The big deductions people use when itemizing are property taxes [$1325], mortgage interest [$1,000], Charity [$500?] and state income taxes [4.63% of Federal adjusted gross, best guess $4175] for a total of about $7000. He will have tax savings of 25% times the difference between his itemized deductions of $7k and the $5800 standard deduction everyone may take. 25% x $1200 represents $300 in reduced federal taxes.

            All together, I estimate, he saves about $1500 by buying the house.

          • MIke says:

            Not the worst idea – but honestly you are spending 10 years of your life obviously living in a house much smaller or lesser neigborhood or something that you can afford. Otherwise, if the house was a $250,000 house with large taxes – they wouldn’t be renting to you for only $500.

            If the guy is buying a “foreclosure” for $150,000 there is a good chance his property taxes will be $3,000 per year. So that alone is already $250 per month.

            Why would you buy if you love the house and can live there? If you are just suffering and living there below your means because you don’t want to pay interest – then that is just a dumb reason.

            Why not just do the following then – rent for 12 months. Save up $50,000. Then buy a house that cost $50,000 in cash. Almost no closing costs etc. Then live there for 5-8 years (Save yourself $6000 per year in rent) and save up more money.

            In 9 total years you can then rent out the house and make a profit on that one AND not have a mortgage on your primary house either.

            Instead – you choose to rent a house for 9 more years and have NOTHING concrete to show for it.

            I did this. I bought a condo lived there for 2 years. Now I rent it out and make about $550 per month profit. I guess that is why some people stay in the gerbil wheel and some of us get out of it.

            I bought the cheapest condo I could find in a nice neighborhood and a 10 year old Nissan Maxima instead of a new car and expensive house.

          • ResponseToMike says:

            “Nothing to show for it”? 200k in cash is NOT nothing to show for it… I’m sure many home owners who bought at the height of the housing bubble would love to have no debt and $200k in savings…

          • Joe says:

            PZ: That may not be the best idea. If something goes wrong it is easier to tap cash in a CD or bank account than to get it from your house. Put enough down to pay less than you do for rent and invest the rest. A s you said buy a house to live in, not as an investment. You buying for cash is doing just that, investing everything in a house.
            Also, there will be inflation in a year or two or three. Taking a mortgage fixes you interest payment leaving you to take advantage of better (higher) rates for your cash.

          • PZ says:

            Hi there, a lot of good comments here.

            But anyway, I wanted to tell you how it all worked out, 18 months later….

            Starting in June 2012, I tried to buy foreclosures in the area I was interested in (downtown Denver), but found that either they were in terrible condition, or if in good condition, were being bought up in droves. So I started trying to buy short sale properties, but there were just too many snags with feet dragging banks. I might have been able to weather the storm, but then 2 things occurred in Sept 2012, my landlord decided to up the rent, and my roommate decided to move out (As an FYI, we were each paying $500 a month to rent the condo). Thus, in order to avoid paying $1100 a month for rent, my hand was forced. I made a deal with the landlord to continue at $500 until the end of November 2012, and hired a realtor. My need to get into a home was at an all time high, and EVERYTHING was getting bought up 10-20 days after going on the market!!! So, I got aggressive, and I put 3 offers on 3 different homes in all at one time, at the discouragement of my realtor. Anyway, I did end up with a contract on 1 of the homes, that weekend 3 more offers came in on the place that I was under contract on. I ended up paying a lot more than I thought I would have due to my sudden ’emergency’, 300k for a 3 BR 2 bath house, and so I decided to only put 20% down and take out a 30 year @ 3.25% (so a lot less than the 4.5% being tossed around in this conversation).

            I promptly rented out 1 of the rooms, all utilities included, for $750 a month, which is more than 50% of my mortgage pmt including tax and insurance. Now I am talking to contractors about converting half of the 4 car garage it came with into living space as well, and updates to the bathrooms and kitchen. Once that’s done I plan to rent out the new room as well for the same amount. Since I closed in Nov 2012, the house has increased in value to 330k, so I was wrong, I admit that, if I had bought in early 2012 I would have probably got the house for 285k, but then again, it wasn’t up for sale then, either.

            Anyway, my point is that I did end up buying, but it was not at all what I expected, and that includes historically low interest rates! If I could have held out for 6 more months, maybe a foreclosure could have been bought, but not for 150k. Time will tell if my house purchase was a good, or bad, decision. I will check back from time to time and let you all know how the home updates/expansion is going.

      • jc says:

        Each State has its own rules regarding ” Walk and Dont Look Back”
        For example. …….california uses the House as the Collateral Damage and will not go after the Buyer. Florida uses the buyers Buttocks and will forever haunt you for at least 20 years garnishing wages and court trials to get their money. Remember, Defaulting puts the House in a auction. Whatever the auction price does not cover the Buyer will be responsible for. My advise to Walkers and Dont Look Backers is this : If you live in a state that uses your buttocks to get the money from a default,,,,,,,NEVER gather assets again. Everytime you deposit money in a bank account, apply for credit this Shows You have means to repay the auction difference from what the Loan amount was and the auction price the home sold for. YOU OWE the Difference. No wonder California Home Buyers were able to Walk away so easy and not Floridians…….Remember is was all about LOCATION LOCATION LOCATION…..that’s what they meant.

        • Jimbob says:

          You do realize someone is covering the cost of the defaulted “walk away” mortgages. In place of the homeowner, it is the taxpayers of California who are currently grappling with a annual budget deficit over $25 billion.

          • Bill says:

            It is not the taxpayers that take the hit in these deals, it was a combination of investors and insurance companies. If you want to call the AIG bailout taxpayers, maybe.

            We short sold and our price was right around the original 80% number, so the bank and investors lost little if any. The PMI holder is who lost. You are going to see much higher PMI numbers going forward, to offset this higher risk.

      • L says:

        The USA will probably not get back on its feet again, at least in our lifetime. So I think people should go on living, including buying and selling homes, in spite of it all.

        • Doug Glass says:

          If you have the means. Of course eating cake while you buy and sell is always a pleasurable thing to do.

        • LightGoldenLady says:

          Unfortunately, I agree. This country in many places, especially cities like Philadelphia PA and Detroit MI, have a lower quality of life than many third world countries do. The only problem is that most people might never be able to own a house if they don’t already the way it is. As for DC, that city literally has a 1/4 of its population as literally homeless and 1/2 living with somebody but still basically homeless.

          • mike gerke says:

            Lightgoldenlady

            You evidently have never been to a real 3rd world country–your comparison is quite ridiculous!!!!

          • CaptainCrunch33 says:

            We’ve lived in other countries. The majority of the people in El Salvador live in stick huts with mud packed in the cracks, no running water, and the toilet is a hole in the ground. In Brazil it is in a slums that are miles long with millions of people crowded together with house constructed of cardboard and corrugated tin. In Turkmenistan, they live on $100 a month, that’s if they have a man as head of the household, if you are a woman with family support you’re trash. Taiwan has people piled on top of each other, with the handicap members of the family placed on a piece of cardboard, along the sidewalks, near the markets, begging for money or food. Don’t try to make a statement of how bad the people in Detroit or PA have it until you have seen the “REAL” world. Many people around the world talk about how they wish they could come here to the USA, because to them it would be paradise compared to how and where they live now.

          • Jimbob says:

            I’ll take inner city Detroit, MI or Newark, NJ or Compton (LA) over the slums in India, China, Indonesia, Liberia, Somalia, etc.

          • Chucks says:

            Haha! I live in Philadelphia PA and I’ve spent the last two months in Nepal. I can safely say you’re completely crazy. Things we take for granted, like 24/7 electricity, water that’s safe to drink out of the tap, toilets that send waste out into a sewage system instead of holes in the ground that feed back straight to the same rivers used to pull out tap water, paved roads and a traffic system (stoplights!), fairly clean air, access to medical care and supplies, buildings that meet earthquake and safety codes are either nonexistent or hard to find and only available to the very rich in Nepal.

          • Dave says:

            LightGoldenLady

            You are incorrect on all fronts. A resident of the third world countries that I have been to in Africa, SE Asia and Central America would walk into our homeless shelters and wonder what king lives there (I’m not kidding). As for 1/4 of D.C. being homeless, that it the most ridiculously unfounded statistic that I have ever heard. I happen to live and work in D.C. and spend time in every neighborhood as part of my job and I can assure you that there aren’t 200,000 homeles people in this city.

          • MountainMet says:

            LightGoldenLady . . . Your assertions are completely incorrect. This country in many places have a lower quality of life than many third world countries? Have you ever been to a third world country? Let me answer that . . . NO! You have no idea how good Americans have it. In fact, being a person who has been to 75 countries, I still say we have the best country on Earth. I don’t like the tax situation and the consistent war on the rich (no, I am not one of them), but the US is still twice as good as the next best country.
            1/4 of DC literally homeless?? Again, you don’t have a clue.

          • rob says:

            So let me get this straight. You think the USA is twice as good as Canada? I think you drank too much of the kool aid.

      • RM says:

        Really, really, it’s all about the bank and wall street fault???!! What about the dumb consumer that make $30,000 a yer and bought a house for $300,000 on interest only, reverse amortization, blah blah prgram that Freddie or Fannie backed. So now because of lack of credit standards both the consumer and the lender looses.. This is the free market and lack of responsibility does.

        You can lead the horse to water, but cannot make him drink. Or they all drank it in this case.

        • groovyman says:

          right on RM. Sure there are greedy bankers and business owners, there are greedy people in every walk of life. People who bought a house they could afford, did a 15 yr mortgage or paid extra toward principle are in ok not underwater. They used their brains not their greedy heart.

          There are jobs out there, or start your own line of work. Only a generation or 2 ago you heard stories of a man working 2 or 3 jobs to support his family. No complaining or blaming. Not anymore, the American man is entitled to it no matter what.

          • Michael Henson says:

            Not true. I bought for $300K in 2006, put $60k down, made all payments on time, and I even paid an extra $20 k on the principle. My rate is 6.5%. My house is now worth $125k, if I’m lucky. I now owe $209K. So where was my stupid mistake and overstepping my means?

          • Pete says:

            Your stupid mistake was when you bought a house that was overinflated by over 100% of its actual value and didn’t see the writing on the wall that housing prices can’t keep increasing 10% a year indefinitely.

          • Saffron says:

            @Michael Henson I also bought in 2006. I paid $0 down and have a 5.5% rate. I paid $90,000 and my home is now worth $125,000 because I did research and didn’t buy an overpriced McMansion.

          • Jimbob says:

            The only issue here is that you have an expectation that your house should be worth much more that the note and growing. Continue to make your mortgage payment and the appraised value will rebound.

          • Bill says:

            Actually 3 years in and we are not doing nearly as bad as his competition (and remember, any Republican is his competition). He took over right at the bottom of huge recession, recessions don’t happen overnight, they are built over years and run in a cycle opposite the peaks.

            Things are starting to get better, and they are not nearly as bad as people make them out to be. My neighbor sold his house in only about a month, it was not a bank or foreclosure either. It was well maintained in a decent neighborhood and he priced it at market rates. The buyers were probably ecstatic to find such a nice deal.

            I am a victim of the recession, just as many others are. I lost huge money on two house deals as I kept buying instead of renting as I chased jobs around the country. Renting now and when we have some savings and looking stable we will buy.

            If you own a home you are not living in (like you moved for a job), consider renting. Rent is really high right now since so many people have lost their homes. Be prepared for the worse though. The show Horders has many people who are renters.

          • Joe says:

            I bought a house a little over a year ago that was foreclosed and was listed for sale at $500,000 just a few year earlier. This area was decimated and I got it for $180,000 (in move in condition). This area has now rebounded and almost all foreclosures were sold (there will always be another one here or there, even in good times) and now houses are selling for “normal prices”. My house has a long way to go to hit $500,000, but the comps are currently $331,000 which isn’t too bad.

      • J says:

        The people replying here don’t get that you will not owe anyone anything for any time. People are too reliant on others. Good for you for saving all this money. At least if you die others won’t have to pick up your estate.
        Besides, spending another year paying $500 for rent a month, not having to maintain the property, giving you another year to search for a great deal on a newer house…. i think people are just jealous.

      • PZ in Denver says:

        The 5 year rule will always apply be it bull or bear market. 3 years ago everyone thought housing was going to zero, now they wonder if home prices will ever pull back again… Things go up, things go down, if you want to buy a home as an investment dont buy in the subburbs, buy in the hot area that is up and coming or close to public transportation lines. If you want to live in your home forever buy in a centralized location, or if you don’t care buy close to where you work, or wherever you want. Think about your future in that house and if it makes sense to live in that location in 10+ years…

    • Canada says:

      I live in Canada and in my area a small one bredroom condo starts at $150,000, a two bedroom at $180,000. A small single family home starts at about $300,000. With an average home costing about $400,000.

      Our prices are in a bubble, and haven’t quite crashed like the USA. I wish I could buy something for $100,000. Rent starts at about $800 a month for a small one bedroom and the average two bedroom rents for around $1300 plus some utilities.

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