How Long Should You Live In a House Before Selling?
When you first buy a house, you may be thinking into the future want to have a strategy in place. In fact, prior to signing the closing documents, you might already ask your real estate agent, "How long should you live in a house before selling?"
The fact of the matter is that some things appreciate with time, and homes are no exception. Let's look at how long to live in a house before selling and determine how your equity offsets your costs and fees.
Is It Too Soon To Sell Your House?
Real estate agents suggest you stay in a house for 5 years to recoup costs and make a profit from selling. Before you put your house on the market, consider how your closing fees, realtor fees, interest payments and moving fees compare to the amount you have in equity.
Equity refers to how much your home is worth compared to the amount you owe on your mortgage. If you need to sell your home after a short time, maybe you're facing a big move, are experiencing a growing family or financial changes. In spite of life events, the costs of selling too early might end up costing you money.
The 5-Year Rule
A good rule of thumb is usually 5 years for homeowners to get a good sale price. The 5-year-rule allows you to make up for certain costs you paid when you got your loan as well as determining the breakeven point.
When you'll actually reach this point varies depending on your particular situation. If you want to make money on the sale of your home, you must go beyond the breakeven point. If you sell too soon, you could lose money on the sale of your home. Building home equity is your best bet.
Can Your Equity Offset Your Costs and Fees?
The more equity you have in your home, the more you'll be able to leverage toward closing costs and save on capital gains taxes when selling a house. Let's go over how to understand equity and take various fees into account and also consider capital gains taxes.
Homeowners gain equity in their homes by paying down the principal amount – the amount you owe on your home – by making monthly mortgage payments. You can also gain equity as your home's market value increases, which typically happens naturally.
Here's an example of how you might build equity: Let's say you buy a house for $200,000 and a few years later, it rises in value to $250,000.
Let's take a look at another example of building equity: Let's say you purchase a home worth $200,000. As you make regular monthly payments, you owe $150,000 on the mortgage. In this case, you have $50,000 in equity.
Factors like down payment, interest rate and mortgage amortization can also affect your home's equity.
A large down payment on your home is one of the quickest ways to build equity. Let's say you purchase a home for $200,000 with a $60,000 down payment. In this case, you will then only owe $140,000 on the home. The larger your down payment, the lower your interest rate may be as well.
As you make payments per month, part of your monthly payment goes toward paying off your mortgage balance and the other part goes toward interest, or a fee for borrowing. Your payments are mortgage amortization.
For an example of amortization, fixed-rate mortgages require you to pay equal installments over the life of the loan. A lower interest rate and a shorter loan term, such as 15 years, can help you build equity faster.
Closing Costs And Other Fees
Before you determine whether you should sell before the 5-year rule, consider whether your home's equity can offset closing costs and other fees as well. You'll pay closing costs, real estate agent fees, financing fees and other fees in order to sell your home.
Let's take a look at these types of fees:
- Closing costs: You can think of closing costs as the fees you pay to process your loan. Closing costs typically range from 2% – 6% of your overall loan amount. They include fees such as appraisal, escrow, property taxes, title/attorney fees, prepaid interest, loan origination fees and more.
- REALTOR® fees: When you list your home with a real estate agent or REALTOR®, you usually calculate your real estate commission as a percentage of your home's final sale price. 6% is a common rate but it might vary depending on your area.
- Financing fees: Interest payments do not go toward paying off your principal. It takes a while before a greater portion of your loan payments go toward principal – more of your payment goes toward interest at first. Consider comparing and contrasting rates between lenders and loan options and what you'll pay in interest over time. Lower interest rates will allow you to pay less over the life of the loan.
- Other fees: You may also pay for homeowners insurance, a mortgage insurance application fee, fees for government-backed FHA, VA and USDA loans as well as lender and owner title insurance.
Due to all of these factors and fees, the 5-year mark is often the most reliable breakeven or profit point for sellers.
Consider Capital Gains Taxes
Capital gains taxes must be paid to the Internal Revenue Service (IRS) on assets you make a profit from when you sell your home. The amount you pay in capital gains tax depends on your income, tax filing status and how long you owned the asset.
You pay short-term capital gains on profits you make from selling assets you’ve held for a year or less. You'll pay long-term capital gains on assets you’ve held for longer than a year.
All U.S. taxpayers are entitled to a lifetime personal exemption of $250,000 for single individuals and $500,000 for married couples filing jointly. This means you don't have to pay capital gains taxes if you make less than $250,000 on the sale of your house as a single individual or $500,000 on the sale of the home as a married couple.
You must also meet the following requirements:
- You must call the home your primary residence. It must be your main home and you must live there most of the year.
- You must have used the home for 2 out of the last 5 years versus 1 year for long-term capital gains treatment.
- You can meet the "ownership" and "use" tests during different 2-year periods. However, you must meet both during the 5-year period as of the date of the sale.
Let's say you bought a house as a single individual and lived in it full-time for 7 years. If you sell it and make $100,000 on the sale, you would not need to pay capital gains taxes because you made less than $250,000 on the sale.
How Do I Know If It’s A Good Time To Sell My House?
The current real estate market also affects whether it's a good time to sell a house. It can also depend on whether it's a buyer’s market or a seller’s market. You'll recognize a buyer's market when home sales are slow, there are more available properties and home values have been declining.
It's a seller's market when homes sell quickly, home shortages occur and real estate prices rise. Here's a quick list of signs that now might be a good time to sell your house:
- Houses in your area selling at higher-than-normal prices
- Increases in housing demand
- Increases in the number of housing sales in your area
The Bottom Line
How long should you own a house before selling it?
There's no "magic moment" that indicates when you should sell your house. However, it's a good idea to consider the 5-year rule and whether your equity will offset your costs and fees. Consider capital gains taxes as well before you decide about whether to sell, particularly if you've lived in the house for less than 5 years.
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