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Is the Market Ready for Short-Term Homeownership?

NEW YORK (TheStreet) -- During the worst of the housing crisis, experts warned against buying a home if you didn't expect to stay put for seven, eight, even 10 years. To use the traditional guideline of three to four years was to court disaster if you needed to sell and prices had fallen.

Are things better now? Overall, they appear to be. Home prices have gone up about 12% in the past year, making it easier to break even or even show a profit after owning a home for only a year or so. And factors that could force an early sale, such as heavy layoffs, have eased.

But with millions of homeowners still owing more than their homes are worth, it makes sense to remember that things can go wrong. It probably would not be wise to buy if you were certain you'd have to sell in two or three years. But if you really expect to stick around for at least four or five, the risk might be worthwhile, especially if you followed a handful of strategies for building equity quickly.

The traditional recommendation of a minimum four- or five-year ownership assumes you need that long for the home's value to rise enough to offset costs of buying and selling, such as 6% broker's commission, transfer taxes, loan application fees and legal fees. If the home gained 3% or 4% a year, a typical pace, it could take three or four years to offset those costs.

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For a short-term ownership to work, start by choosing the neighborhood carefully, looking for one where prices have been rising and values are based on solid factors such as good schools, convenient shopping and easy commuting.  Be wary of areas where prices have soared, as they could flatten or fall.

Think carefully before buying a newly built home. These often sell for a good deal more than comparable existing homes. Though there are benefits, such as a builder's warranty and freedom from repairs, buyers may not want to pay that premium if the market has soured in two or three years. Also, developments sometimes stall, and you could be left with a perfectly nice home surrounded by muddy lots.

On the other hand, if the development is really hot, you might do well on a newly built home, especially if you can get an early buyer discount.

Next, be sure not to pay too much. That sounds pretty obvious, but your real estate agent may argue, for example, that at today's low mortgage rates, such as 4.36% on a 30-year fixed-rate loan, borrowing an extra $10,000 will add only $50 to the monthly payment. But taking on another $10,000 in debt means you must sell for $10,000 more to break even. So drive a hard bargain, don't look desperate and be willing to walk away.

A loan with a low rate can be very helpful to the short-term owner, because when rates are low more of each month's payment goes to principal, reducing the debt faster. That reduces the risk you could owe more than the home would fetch in a sale. (Keep in mind, though, that reducing the debt faster does not mean you'd make a profit. That requires selling for more than you'd paid.)

So, if you really think you'll own the home for just a few years, look into an adjustable-rate mortgage. A three- or five-year ARM will have a lower rate during the initial period than a 15- or 30-year fixed-rate loan, and as a short-term owner you would not have to worry about big rate hikes down the road.

Warning: Low mortgage rates have also helped drive home prices up on the past couple of years by allowing buyers to get bigger loans. If rates rise in the next two or three years, buyers will have less to spend, and that could dampen prices.

The short-term owner should also consider investing some sweat equity  completing some do-it-yourself improvements. Renovations and remodeling done by pros often do not add as much value as they cost.

Finally, think hard before opting for a short-term ownership. The buying and selling costs mentioned earlier make it very hard to turn a profit on a home over a short period, and an unexpected expense such as a new roof or furnace could put you in the red even if home prices do rise. If you're certain you'll have to move in two or three years, renting may be a better option.

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