shadow

If you're planning on moving in the next five years, rent

If you think you want to buy a home, you should first consider how long you plan to stay in the area. If you think you might move again in the next few years, it's a better plan financially to simply rent, as the first five years are the hardest for building up equity.

Rick Bowmer/AP
This Sept. 2011 file photo shows a house for rent and for sale sign in front of a home in Portland, Ore. If you're thinking about buying a home, but may be moving within five years, it may be smarter just to rent for that time.

If you’re thinking about buying a home, one of the first things you should consider is how long you’re going to stay in the area. If you’re pretty sure that you’re going to be moving elsewhere within five years, you’re better off renting.

Why is that? There are several reasons.

First, the first five years of the mortgage are the worst years for building equity. The vast majority of each of your payments during the early years of your mortgage is going to go straight towards interest. On a thirty year mortgage, you build approximately 5% of your home’s value in equity during the first five years of the mortgage.

Second, much of that small amount that you do build in equity will be eaten by realtors when you sell.You can try the “for sale by owner” route to try to recoup some of that value, but there are challenges and expenses involved with going that route as well.

Third, what equity isn’t devoured by the realtors will be devoured by the bank. Closing costs are not your friend. They can add up to a noteworthy portion of your mortgage, particularly when you’re really only concerned about the small amount of equity you’d build during that time.

Finally, the housing market isn’t the giant money rocket that it was seven or eight years ago. At best, home prices are stable. In many areas, they’re still drifting downward. You’re not going to make a mint by buying a house, waiting a year, and then flipping it. If you’re reading any personal finance advice that suggests doing so, check when that advice was written. I’m willing to bet it was in 2008 or before.

If you’re thinking about buying a home, one of the first things you should consider is how long you’re going to stay in the area. If you’re pretty sure that you’re going to be moving elsewhere within five years, you’re better off renting.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.