Home transactions are expensive, totaling as much as 14 percent of the purchase price, by the time you buy and sell your home.
That means the period you live there has a lot to do with how you can sell or lease your home at break-even or a profit, and buy another home. Adjustable rate loans are ideal for short occupancy, because they are often a point or two lower than fixed-rate loans, but make sure the reset period is far enough away that you can sell the home before your payments get larger. If you’re planning to occupy the home for years to come, or turn it into a rental after a few years, a fixed-rate loan is much better. It costs more but your payments will always stay the same (hazard insurance and property taxes can change.)
It may take living in the home two to four years or longer for you to break even at selling time. Your lender can help you run the numbers. What if you have to move before you can sell at break-even or a profit?
Strategies for a short stay
If this is your first home, you have three options once you own it – live in it, lease it as an investment, or sell it. The terms of your loan may dictate what you can do and how soon you can do it.
Mortgage interest rates, property taxes and capital gains taxes are more favorable to owner-occupants than non-occupying owners or investors:
- To qualify for a homestead interest rate, you must occupy the home you’re going to buy. Otherwise, non-occupying buyers are required to put 25% down and pay a higher interest rate as investors.
- FHA loans require you to occupy your home for one year after closing. After that, you can rent it or sell it with no restrictions. The low FHA rates are intended for homesteaders, not as a subsidy for home flippers or investors, which is the reason for the restriction.
- If you have to move for any reason, you can rent your home or sell it at any time, but tax consequences may apply.
Strategies for a long stay
Many investors acquire rental properties by occupying them first. They get a better loan rate, property tax rate, and they can sell them within five years without paying capital gains. You can buy as many homesteads as you wish, as long as you stay two years or more. The longer you occupy your home, the more equity you will build. You’ll pay down your mortgage, and over time, your home’s value should rise. Keep your home in top condition and it will hold its value longer.