The Five-year Equity Rule

When you buy a home, plan on staying there for approximately five years. Why? You’ll need equity in order to sell the home without losing money. 

Equity is your percentage of ownership VS how much the bank owns. With any mortgage loan, the first few years of payments go more toward paying interest than reducing your principal. To build enough equity to sell at break-even or a profit, you’ll have to recoup closing costs and fees as high as 14% in some areas. To build equity over time, do the following: 

Put more money down. If you put 20 percent down, you’re in good shape, but if you put down 3.5%, 5% or 10%, it will take longer to build equity, so be patient. 

Pay your mortgage on time and in full. Paying principal builds equity. The more months you pay, the more equity you’ll build.  

Make additional mortgage payments. You can add an extra $50, $100, or any amount per mortgage payment. This will also help you get rid of private mortgage insurance or allow you to refinance to a PMI-free loan once you reach 22% equity. 

Let time and the housing market work for you. The housing market typically rises one to two percentage points above inflation annually, but if you’re lucky, your home may gain much more value than that.  

Building equity takes time, money and luck, which is why following the five-year equity rule will help you plan when to sell your home.   

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