A home is the biggest purchase many people will ever make, and because home values can move abruptly in either direction, homebuyers are often advised to think of a prospective home primarily as a place. If it also happens to turn out to be a good investment, that’s icing on the cake.
Even when home prices march steadily upward, it still takes time to for homebuyers who have financed a purchase with a mortgage to recoup their investment.
Transaction costs — like mortgage origination fees and title insurance on the front end, and real estate brokerage commissions on the back end — can add up to 10 percent or more of a home’s purchase price. The way mortgages are structured, most of a homebuyers initial loan payments are going toward interest, rather than principal.
A homebuyer who has to sell their home too quickly can lose money — even if it has increased in value.
So homebuyers, particularly first-timers, are often advised to think about how long they will be able to stay put in a home. If the answer is less than five to seven years, renting might make more sense.
Most online buy vs. rent calculators are based on the assumption that a buyer will live in a house for seven years, Reuter’s Beth Pinsker reports in a “Your money” column.
But Trulia Chief Economist Jed Kolko says that the average is more like 8.5 years. Ilyce Glink, publisher of thinkglink.com, thinks that homeownership doesn’t start to look like a solid investment unless buyers are looking at staying put for at least 10 years.
With today’s shaky job market, that’s a time frame that fewer prospective buyers will be able to commit to with confidence.
What’s your advice to homebuyers who are considering whether they’d be better off renting?