Do You Really Need to Stay in Your Home for 3-Plus Years to Break Even on Your Mortgage?

As a home buyer, it’s common to hear experts recommend that if you’re going to buy a new home, you should be prepared to stay there for a minimum of three to five years. The reasoning behind this advice is that it’s very difficult to break even on your mortgage by selling sooner. You need to wait until you’ve gained some equity in your home or — as is the case in my friend’s story that I’m about to share — your home has appreciated enough in value.

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Costs of buying and selling

There are various transaction costs involved with buying and selling your home. It’s these costs that are to blame for not being able to break even on your mortgage if you sell sooner than the three-to-five-year mark.

Transaction costs include:

  • Closing costs (3% to 5% of your loan amount, on average)
  • Real estate agent seller’s commission (4% to 6% of your home’s sale price, on average)
  • Any funds spent to prepare your home for sale via repairs and renovations

Without a good bit of home equity or a big boost in sale price versus purchase price, it’s impossible for sellers to come out ahead after factoring in these transaction costs.

However, as is the case with most rules, there are some exceptions. My best friend recently found herself in a situation where she was able to sell her new home after living in it for only a year and still come away with a nice profit. Here’s how she did it.

Not her dream home after all

When my friend bought her house last summer, she was over the moon. It was her first home purchase and she had big dreams for decorating and updating the home in a spectacular fashion and raising her two children there.

However, she didn’t count on how much she would come to hate the well water at the home, or how much she would dread mowing the half-acre yard. She also decided that she’d prefer her children go to a different school district. All these factors, together with the current red-hot state of the housing market, led her to explore selling that home after only a year of living in it.

Note: The one-year mark here is important. If my friend had sold her home prior to owning it for a year, she would be subject to short-term capital gains taxes, which opens up a whole new can of worms and special considerations for today’s home sellers.

Home value appreciation for the win

My friend purchased her home in July of 2020 for $235,000. She’s now in contract to sell for $282,000, which is $4,000 over her asking price. This gives her a profit of $47,000. She entered into contract after only one day on the market and multiple bids on the home. Even assuming a seller’s agent cut of the maximum 6%, she’ll still come out over $30k ahead on the sale, ($282,000 x 0.06 = $16,920), ($282,000-$16,920= $265,080).

If my friend’s home had been worth the same amount today as it was when she bought it last year, it absolutely would not make sense for her to sell at this time. Buyers have very little equity in a home after just one year, so after paying her seller’s agent fees, she would come away with a loss on the transaction.

But because we’re in such a drastic seller’s market right now, and because people are willing to enter into bidding wars and pay so much more for homes, my friend’s situation worked out perfectly for her — with the help of one final factor.

Where will she live now?

Despite the fact that homes are selling for such higher prices today than they were even a year ago, it still doesn’t make sense for most homeowners to sell. The reason? Generally, when a homeowner sells their home, it’s assumed that they’ll turn around and have to buy a new home to live in. And unfortunately, the seller then becomes the buyer and will have to face the same bidding wars and inflated home prices. At that point, it’s likely any profit they made on their home sale will have to be spent paying for a new, significantly-overpriced home. This is where my friend really lucked out.

Her new plan is to buy a plot of land and build her true dream home. Of course, new construction homes have price increases right now, too. To combat this, my friend plans to wait it out and move back in with her parents while the overall market and construction prices cool down.

Her parents also bought a new home last year, and it has just enough room to accommodate my friend and her two children for as long as necessary before she can get the plans for her next dream home underway.

Admittedly, not many homeowners will find themselves in the situation my friend did. And unless you have a friend or family member willing to take you in or are willing to move into a short-term rental until the housing market begins to level out, then selling your home today, even for an increased price, probably will not make sense for you. But if you find yourself with options or lots of flexibility surrounding where you’ll next call home, go ahead and do some research to see how you might come out ahead as a seller in today’s market.