Understanding House Equity

How long you plan to stay matters because real estate investments aren’t liquid, and because they could be either easy or difficult to sell (depending on market conditions and other variables). It’s best to choose a home in a location where you’re going to stay a while. If something comes up (a family change, a job relocation, etc.), you can always put your home up for sale, but it’s best not to count on a quick sale before you even get into your new house.
The longer you own a home, the more equity you establish in your property. Studies show that most people stay in their homes for five to seven years. For the first few years, however, nearly 100 percent of your mortgage payment will go toward interest. Mortgages are ‘‘front-loaded’’ on the interest side, which means lenders use your payments primarily to pay down interest before applying it to the principal amount. This is good if you’re itemizing tax deductions, but bad if you’re counting on a quick accumulation of equity during those early years. Also remember that unexpected personal or family crises (medical emergency or a death in the family) or change in lifestyle (a new job in a new city) could force you to sell your home long before you had anticipated.

How long should I plan to live in my new home to make the investment worthwhile?

The market will dictate the purchase price and length of time to sell, and if you haven’t been in the home very long, you could end up losing money on the deal in your urgency to sell. It’s something to think about before you start your house hunt, since the mobility that renting provides can be an advantage when it comes to dealing with such issues. The length of time you expect to own your home also affects your down-payment and closing strategies, as well as the type of mortgage you choose. For example, a fifteen-year mortgage will require larger monthly payments than a thirty-year loan, but you’ll see your principal loan amount reduced sooner if you take the shorter-term loan. If you plan to stay in the house five years or less, you may want to consider an adjustable-rate mortgage (ARM)—which offers lower interest rates and helps the owner start paying off the loan principal balance sooner—but if you plan to live in your home for the next ten to twenty years, you may want to lock into a fixedrate mortgage.
There are also prepayment penalties to watch out for (charged by the lender if the loan is paid off before maturity), and if you sell your home before the loan matures, you must also pay the remaining balance of the loan.

How do I start my Internet home search?

A good starting place for your Internet search is a national Web site like Realtor.com, which essentially ‘‘aggregates’’ listing information from agents across the country and makes a limited amount of that information available to potential buyers. Once you’ve narrowed down a few homes, you can contact directly the agents who have listed the home, or you can put your own agent on the case by handing over the MLS numbers or listing information on the specific properties.
If you’re looking for an FSBO, try a Web site like BuyOwner.com, For SaleByOwner.com or Foxtons.com, where you can key in geographic preferences and home qualities to see what type of properties are being offered directly by owners in your region.
Realizing that home buyers are more sophisticated and accustomed to having information at their fingertips, most agents and sellers these days create Web sites that include basic information about the home (general location, asking price, square footage, number of bedrooms/baths, etc.), one or more still photos, and a virtual tour that will give you a 360-degree view of one or more rooms. Combined, these various tidbits of information can help you decide whether the home is worth seeing in person.