Starter Home Vs. Forever Home

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Whether you’re ready to buy a home now or you’re planning for your future, you have plenty of choices to make! One of the first things you need to decide is whether to buy a more economical “starter home” or save longer to purchase your “forever home.” To make the right decision for you and your family, you’ll need to consider factors like market conditions, finances, and future plans. Here are a few things to consider as you weigh your options.

Advantages of a Starter Home

Saving for your forever home could take years. While you wait, you’ll miss out on current interest rates, which are still relatively low. Depending on where you live, a mortgage may also be less expensive than your monthly rent. With rent prices on the rise across the country, buying a home may be cheaper than renting a home in most states.

Homeownership also comes with significant tax benefits; even if a mortgage payment is slightly higher than what you’d pay to rent, many of the costs of homeownership are tax-deductible, such as:

  • Mortgage interest
  • Private mortgage insurance
  • Property taxes

If you choose to sell your home later, up to $250,000 of your profit could be tax-free under the capital gains exclusion. Speak to an accountant regarding your specific situation.

Buying a starter home is also a flexible way for young people to build wealth while they decide what they want in the long term. To a twenty-something, it may feel impossible to predict what kind of home you’ll need or want in the future. If you buy a starter home and circumstances change, you may be grateful for that smaller mortgage. If you decide to change careers or move across the country, it may be easier to sell your home or rent it out as a long-term or short-term rental through a platform like Airbnb.

Advantages of a Forever Home

It’s no secret that new homebuyers are struggling to enter the real estate market. The median home price in the US is $220,000. If that sounds steep, that’s because it is — in 1998 the median home price was $152,500.

Fixer-uppers may be partially to blame. As investors buy up houses and flip them for profit, it’s harder for families and individuals to find affordable homes. If starter homes are hard to come by in your area, consider saving longer to buy something that more closely fits your long-term goals.

There are no guarantees in real estate; you can’t be certain that if you buy a home today, you’ll be able to sell it for a profit later. Market analysts predict that housing development will soon outpace the number of buyers, resulting in a buyers’ market. Also, a recent survey conducted by Zillow and Pulsenomics found that more than half of real estate economists believe the next recession will start sometime in 2020.

There’s no way to know how long the market could struggle before shifting again in favor of sellers. If you buy a starter home now, you may find it difficult to sell in five years. With uncertainty on the horizon, it may be wiser to save now and buy your forever home later.
Many first-time homebuyers have young families or hope to have children soon. A starter home might make sense for your current lifestyle or your five-year plan, but things don’t always play out the way you expect them to. A lot can happen in five years — and the younger you are, the more likely you are to experience significant life changes.

If your family’s growth outpaces your ability to upgrade to a bigger home, things may quickly become uncomfortable. Rather than a five-year plan, think further into the future. Saving a little longer for a house that can accommodate your family in the long term may save you a lot of grief down the road.

Consider a Compromise

First-time homebuyers are competing against each other and investors for a limited supply of affordable starter homes, which may make buying a starter home unrealistic. On the other hand, home prices may rise faster than you’re able to save money, placing the home you want even further out of your reach.

If a starter home doesn’t feel right, but you’re still a long way off from being able to afford the bells and whistles that come with your forever home, consider a more moderately priced home that falls somewhere in the middle. Here are a few tips to find the ideal home:

  • Prioritize. Look for a home that will accommodate your family and leave a little room to grow. If you plan to have children or care for an elderly parent, look for extra bedrooms and a backyard, but maybe sacrifice that chef’s kitchen or the dreamy master closet.
  • Be Strategic. Look for a home that doesn’t require major repairs and be sure to maintain it well. Avoid making any major renovations that might negatively impact the resale value.
  • Increase Your Home’s Value. After a few years, begin investing in affordable home improvements that can raise the value of your home, such as nice landscaping or an energy-efficient front door. When you’re ready to sell, you can use the profit as a down payment on your forever home.

The choice between purchasing a starter home or going straight to the forever home is incredibly personal and will look different for every buyer. An experienced real estate agent can guide you through these decisions and help you ask the right questions.

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