Ever heard of the Five-Year Rule as it pertains to real estate? For a while the rule was thrown out the window when people were buying properties, flipping them, and selling at a profit after a few months. But now the market calls for long-term commitment again and those considering buying a condo should take heed.
As a rule of thumb, if you want to purchase a condo or house you should plan to live in it for a minimum of five years. Some real estate experts say seven years is more realistic these days because home appreciation is harder to predict. Generally speaking though, after five years the cost of owning a home balances out with the cost of renting and actually starts to become less expensive in the long run. At that point, the amount spent in closing costs and upfront fees are no longer a factor and you’re building up equity in the home. Plus, when the market turns around the home values will eventually go up, increasing the amount you can sell your place for in the future.
Even if you know you are going to stay in your condo for five years or more, other pieces of the puzzle have to fall into place to create an ideal situation to buy. Financially, you must be stable and have enough liquid assets for a substantial down payment. Lenders have tightened up mortgage requirements, making it necessary for borrowers to have more money upfront and great credit.
Fortunately, interest rates are extremely low right now, hovering around 5 percent. This contributes to lower monthly mortgage payments and more affordability. In some cases, people actually pay less per month to own than rent – this is more common in short sale and foreclosure purchases where home prices have dropped dramatically. Certain lending institutions only want 5% down on conventional mortgages for condos, instead of the 15 – 20 percent many major banks demand. And FHA loans have minimum down payments of 3.5% on FHA-approved condo buildings.
Planning five years out requires a solid grip on your future goals. You have to ask yourself where you will be in five years’ time (location-wise, job-wise, family-wise, etc.). Will your profession allow you to stay in the same spot, or is a mandatory transfer to another city a possibility? If children are on the horizon, will the home be large enough to house additions to the family? Is a change in your earning power likely, such as a salary raise or cut? Also, think about additional expenses you might take on in the next five years – a child’s college tuition or new car payment – that could significantly alter your ability to cover the mortgage comfortably.
And don’t forget, first-time homebuyers and those who have not owned a primary residence in three years or more could also benefit this year from the economic stimulus bill’s First Time Homebuyers Tax Credit. The credit is for 10% of the purchase price up to $8,000 when you buy a condo or other home before December 1, 2009. Unlike previous federal incentives for homebuyers, the money does not have to be repaid. Income limitations apply after $75,000 a year for individuals and $150,000 for married filers. The tax break will help homeowners offset the initial expenses associated with buying property and close the gap between renting and owning costs during those first five years.
