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Mortgages

Is it too early to sell your house? Here's what you should consider

Selling your house too soon can be a costly mistake.

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Azmanjaka | E+ | Getty Images

Buying a house ranks as one of the most expensive and complicated purchases many Americans will make, but selling one comes with its own set of risks.

This is especially true if you've bought your house relatively recently and have sunk a significant amount of your savings into acquiring the property. You have to proceed carefully to make sure the expenses associated with selling don't add another, unbearable burden to your finances. CNBC Select spoke to Fredrick Briddle Jr, a real estate agent in the Seattle area, to discuss when it makes sense (financially at least) to sell your home and when you should delay putting up that "for sale" sign.

How soon should you sell your home after buying it?

Generally speaking, the longer you can hold onto your house after buying, the better for your financial health. More time lets you build more equity (the difference between how much you owe on your mortgage and the home's value) and take advantage of potential home value growth.

A guideline commonly cited by real estate experts is to stay at your house for at least five years. On average, this is how long it takes a homeowner to make up for mortgage interest and closing costs. "If you are upside down on the home or you have to pay out of pocket, that is a clear indication it may be too early to sell," Briddle says.

Sometimes you can't wait to sell your home — you may have to move cities for a job opportunity, for example. In that case, answering the four following questions will give you an idea of how selling your house earlier than recommended will affect your finances.

Do I have enough equity in the home?

Equity is how much of your home you own outright, which you can determine by subtracting the principal you owe on a mortgage from the home's current value. For example, if you took out a mortgage for a $400,000 home and made a 20% down payment, the equity you have in the home is $80,000.

You want as much equity in your home as possible before you sell because you'll have to pay off the mortgage when closing the deal. The more equity you have, the more money you get to keep from selling your house.

Each mortgage payment you make increases your equity. Your equity also increases when the value of your home goes higher, which happens thanks to appreciation. "National home appreciation average is said to be around 4% annually," Briddle says. "That will vary from city to city. In some areas, appreciation has been 10-20% and higher."

If your $400,000 house appreciated by 4% in the first year, you've gained $16,000 in equity in 12 months just by owning your home.

Your equity is another reason why getting the best mortgage possible is so important to your financial health. CNBC Select ranked SoFi as the best lender for buyers looking to save money on their mortgages, and Ally Bank for buyers wanting to save on lender fees.

SoFi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    VA loan, FHA loan, conventional loan, fixed-rate loan, adjustable-rate loan, jumbo loan, HELOCS & Closed End Second Mortgages

  • Terms

    10 – 30 years

  • Credit needed

    600

  • Minimum down payment

    3%

Terms apply.

Pros

  • Fast pre-qualification
  • Provides access to Mortgage Loan Officers for guidance
  • 0.25% price reduction when you lock in a 30-year rate for a conventional loan
  • Offers up to $9,500 cash back if you purchase a home through the SoFi Real Estate Center

Cons

  • Doesn't offer USDA loans
  • Mortgage loans are not available in Hawaii

Ally Home

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, HomeReady loan and Jumbo loans

  • Terms

    15 – 30 years

  • Credit needed

    620

  • Minimum down payment

    3% if moving forward with a HomeReady loan

Terms apply.

Pros

  • No lender fees
  • Preapproval in as little as three minutes
  • Available in all 50 states
  • HomeReady loan only requires a 3% down payment

Cons

  • No FHA, USDA or VA loans
  • No home equity line of credit (HELOC) loans
  • No physical branches

Will I have to pay a capital gains tax?

Taxes might also play a role in your decision — namely, the capital gains tax.

If you make a profit selling your home, you may be subject to the capital gains tax. You can claim an exemption of up to $250,000 in profit (or up to $500,000 if you're married and filing jointly) if:

  • You owned the home for at least two years.
  • You also lived in the home for at least two out of the five years preceding the sale.

Even if you meet the conditions above, you'll still have to pay long-term capital gains tax on any profit more than $250,000 (or $500,000 if married and filing jointly). For example, say you bought a house for $700,000 in 2017. You made a few renovations to increase its value. In 2022, when home prices shot up, you seized the opportunity and sold the house for $1 million, earning $300,000 in capital gains. Since you owned and lived in the home for five years, you wrote off $250,000 of those earnings, leaving $50,000 subject to capital gains tax. Your income puts you in the 32% tax bracket, meaning you paid $16,000 in capital gains tax.

Given the complexity of the tax code and the amount of money involved with selling a house, you'll want some expert advice before proceeding. "Always talk to a tax professional to determine your situation," Briddle recommends.

Have I factored in additional closing costs?

Whatever the buyer of your house agrees to pay isn't what you'll walk away with. You'll also have to account for any additional costs.

For instance, you might want to do some repairs before selling to make your house more desirable and increase its value. You might also want to have it professionally cleaned and staged, which will also add to your initial costs.

Then, there are closing costs to consider. For sellers, they're typically higher than for buyers since the seller pays both the listing and buyer's agent's commission on top of other fees and taxes.

"Selling your home will cost roughly about 10% of the sales price in fees needed to close the transaction," Briddle says.

What's the current market?

Ideally, you want to sell in a seller's market with a low inventory and many interested buyers.

For example, the housing market from May 2020 to May 2022 was a seller's market. The competition among buyers became so heated, many offered over the bidding price and waived contingencies, quickly driving the national median home price up. It was a tough time to buy — but a great time to sell.

Of course, sometimes you don't get the luxury of waiting for the perfect market to sell. And no one can predict for certain how the market can change. For that reason, it's best to consider the current conditions and work with them.

"You can make money in an up-, down-, or side-to-side market," Briddle says. "You can also lose money in any of those markets."

Crunching the numbers

Let's see how you can apply these factors using a hypothetical example.

Two years ago, you bought a $400,000 home with $80,000 down at a 5% interest rate. You also paid $20,000 in closing costs. Now, you might have to sell it and want to see whether you'll lose money if you do.

First, calculate how much equity you have in the house. You can use one of the amortization calculators online, like this one from Freddie Mac, to help you. Since a larger share of your payments goes toward interest at first, you've only gained a bit under $9,700 in equity in your two years of ownership.

You look up home appreciation rates in your area and find that on average, houses in the local market appreciate by 5% annually. This means you might be able to sell your home for around $441,000 now — and add $41,000 to your equity.

All in all, you have about $130,700 in equity. That's nice, but you've also paid more than $39,400 in interest over two years. Now let's take a look at the potential costs that could come with selling your house.

Your home is in good shape and doesn't need repairs but you want to stage it. You call around and find that you can expect to pay about $1,500 per month with a three-month staging contract. For that, you estimate your total to be $4,500.

You aren't expecting to pay the capital gain tax, but there are still closing costs to consider. If $441,000 is your listing price, you can expect to pay 10% of it in closing costs — or $44,100.

Now you need to put these numbers together and subtract the interest you've paid and any additional costs you expect to accrue from your equity:

$130,700 (your estimated equity) — $20,000 (closing costs when buying) — $39,400 (mortgage interest) — $4,500 (staging) — $44,100 (estimated closing costs when selling) = $22,700

Looks like you might be able to sell without any loss — and even make a bit of profit.

How to avoid selling too early

If you've done the math and found that you'll lose money if you sell the house, consider the alternatives.

For instance, if you need to move due to a new job or changes in your family, you might want to look into renting out your house. While managing a rental property may be challenging, it can help you avoid the financial losses of selling too early.

If you're looking to sell because you're in a tough financial spot and can't afford your mortgage payments, contact your lender and explain the situation. You might be able to qualify for mortgage forbearance, which can reduce or pause your mortgage payments for as long as 12 months. Another option is mortgage modification which allows you to change the terms of your loan to decrease your monthly payments.

If all else fails and you have no choice but to sell, "figure out a plan and stick to it," Briddle says.

"If you... need to get out of the mortgage on your home, communicate immediately with your lender. Don't bury your head in the sand... Have a strong game plan with a [real estate] agent and find the right audience for your property."

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Bottom line

Typically, the longer you hold onto a house, the better. This way, you can gain more equity and take advantage of home appreciation. However, if you're thinking of selling early, do the math to ensure you won't lose money on one of the most important investments — your home. If you find that you'll take a loss, try to look for a different solution before selling.

"Real estate is one of the most consistent ways to build wealth," Briddle says. "You are paying a mortgage either way. It will either be yours or your landlord's."

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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