Before you buy your first home, you should decide whether to buy a starter home or a long-term home. There are advantages and disadvantages to both, many of which depend on your circumstances.
A starter home is a modest, affordable and smaller property that may suit a smaller family. First-time homebuyers often want a starter home to keep their expenses low while building up home equity.
When determining whether a starter home is the right choice, there are several things to consider. Look at prevailing market conditions, the neighborhood you want to live in, the type of home you want and how much you can currently afford.
Pro: Creates Stability
Owning a home provides a sense of stability that renting does not. Unlike living in a rental, there is no risk that someone will cancel your contract and kick you out of your home. If you cannot afford a larger home, then settling for a smaller home at least bolsters your feelings of stability.
By purchasing a less expensive home, you are more likely to keep up with payments rather than fall behind. You create financial stability through owning a home by acquiring home equity and increasing your credit score through regular, responsible payments on your mortgage.
Con: Moving Twice
Moving is a physically strenuous, costly and time-consuming process. Buying a starter home with the understanding you may be upscaling into a larger or more expensive long-term home means accepting in advance you are going to be moving again in the future.
Furthermore, the process of buying and closing on a house and home loan is not any easier for a starter home than a larger home. Buying a starter home means knowing in advance you may be going through this whole ordeal a second time as well.
Pro: Financial Perks
When you own a home, you earn more and more equity as you pay down your mortgage and make improvements. You can then use this equity to take out home equity loans or lines of credit to further improve your finances or property. Other financial perks homeowners receive are tax benefits, such as the mortgage interest deduction, a tax deduction on the interest you pay toward your mortgage.
Related Article: Hidden Expenses to Consider Before Buying a Home
There is a more general financial perk stemming from buying a starter home even if you can afford a larger, more expensive home: you keep more cash in your pocket.
If you want to plan for a family or pay for other, more immediate expenses, like an education or medical costs, keeping that cash around can help you out. It is always a good idea to look at houses that come in under budget rather than houses that stretch your finances.
Con: Lack of Flexibility
Owning a home ties you down unless you rent the property out to tenants or you sell it. Living in a rental, on the other hand, gives you eminent flexibility. You can get out of your lease and move to another spot on a whim if the need or desire arises.
Additionally, in a rental, your landlord is typically responsible for much of the home’s upkeep. That means you do not have to worry about painting rooms or replacing appliances. However, in a property you own you must take care of everything.
Therefore, if you are just starting out in life and do not know what the future holds, buying any sort of home right now may not be wise. Instead, it might be better for you to continue living in a rental. When you are more certain that you can settle down and you know where you want to do it, you can begin house hunting.
Interest rates are always changing. If you can buy a home now at a low interest rate, even if it is just a starter home, you will save money. However, if you purchase a home when interest rates are high, you could end up paying several thousands of dollars more over the course of the loan. Even if it means waiting longer than intended for interest rates to drop back down again, looking for those low interest rates makes a big difference.
Related Article: Financing a Home Purchase
Although a home’s market value can fluctuate over time, prices generally tend to rise rather than fall. This means the longer you wait to buy any home, the more you are likely to pay for it. Buying a home while interest rates and prices are low allows you to reap the benefits of homeownership. You can then wait until your income and market conditions allow you to purchase a larger home.
Con: Capital Gains Tax
If you know you may be able to afford your long-term home sooner than later, beware of buying a starter home in the meantime. If you sell any home too soon after buying it, you could be subject to a capital gains tax on the profits from the sale.
The capital gains tax charges up to 15 percent on the first $250,000 of profits from the sale of your home if you are single. It collects up to 15 percent from the first $500,000 in profits if you are married.
To avoid the capital gains tax, your home must be your main residence for at least two of the five years preceding its sale. Therefore, if you think you may be ready to move out of your starter home within two years after buying it, you may want to seriously reconsider this plan.
Pros: Less Upkeep
Since starter homes generally tend to be smaller homes, they are much easier to clean and maintain. Not only does it cost you less to buy a starter home than a long-term home, but it can cost you less in time and money to live in a starter home than living in a larger home, whether as an owner or renter. Cleaning takes less time. Utilities additionally cost less when you are living in a smaller starter home, since you do not have to heat or cool as much space.
Related Article: Determining Your Housing Needs