Is a starter home right for you or, should you set your sights on a forever home instead?
When the Baby Boomer generation was venturing into adulthood, it was common for them to buy a starter home — a modest, small dwelling. As their families grew and their careers advanced, many moved into bigger or better homes.
Today, the ability to work remotely has opened up many more options and opportunities for home ownership in many affordable areas of the Country. If you’re a first-time homebuyer, you may be wondering: should you buy a starter home in a suburb that’s more affordable or spend a little more on a larger, forever home?
What defines a starter home?
A starter home, or starter house, is a short-term, small dwelling that’s usually purchased by first-time homeowners because of its affordability.
A starter home typically has one to two bedrooms with one bathroom and roughly 750-1,300 square feet of space. The home usually serves the basic needs and are great for first-time homeowners who aren’t ready to commit to a residence for the long-term. Homeowners usually only live in a starter home for 3-7 years or at least long enough to see a return on their investment. In 2022, that can happen rather quickly with escalating home values due to a Nationwide shortage of available homes.
What is a forever home?
A forever home is a house you can see yourself living in for a long time. About double the average price of a starter home (in the Metro-Phoenix market, the average median home price is about $445,000), forever homes are also much larger in size with at least 2,000 square feet of living space, three bedrooms and two baths.
Generally, forever homes are best for homeowners who are looking to settle for at least 10 years and want a space that can evolve with upcoming life-changing events like having kids or simply having enough space to be comfortable for the long run. You like the location, you have a stable job, and you don’t have any plans of moving out of state or farther away from your target area in the near future.
Starter home vs forever home
Home ownership is a personal choice, and there is no one right path to take. Stick within your comfort zone, weigh what’s best for your circumstances and future plans, and trust your instinct.
Some of the Pros:
Smaller down payment: Starter homes are typically the most affordable option for home ownership. When you buy a home, you have to put down a certain percentage toward the purchase price. The percentage, called a down payment, varies widely. Starter homes typically require a smaller down payment, since they’re less expensive. You can expect to put down about 3% – 20%) on a starter home.
Lower monthly payments: Because the down payment is smaller on a starter home, you’re able to save more quickly and put a larger percentage toward the purchase price to pay down the principal — lowering your monthly payment amount. A smaller home also tends to mean lower carrying costs like utilities, property taxes, and insurance.
Less maintenance: A smaller space means less to maintain, and it can also mean saving money on fewer furnishings. You’ll also likely save time on chores like landscaping, cleaning, or removing debris from the roof during monsoon season.
Build equity sooner: Getting into an affordable home sooner means you could start building equity sooner if your home continues to appreciate. For about the past five years, starter homes appreciated very quickly by comparison to homes valued in the middle and top tiers.
That’s still the case in a majority of the nation’s 50 largest metros, where ferocious buyer demand is driving up prices across the board.
May be easier to sell: Research shows that starter homes in the low-to-middle price range sell the fastest. (The very least expensive homes take longer to sell, likely because they’re in need of repairs.) The faster selling speed could mean that if you want or need to sell, you might sell more quickly than if you were trying to sell a more expensive home.
It’s worth noting however, that in 2021, homes are flying off the market at record pace due to demand, a relative lack of supply of for-sale homes and historically low mortgage interest rates.
More competition: Because starter homes are among the most affordable homes, they are often the most sought-after. In competitive markets, where buyers outnumber sellers, like Metro-Phoenix, you could be in for a prolonged search or a stressful bidding war.
Harder to generate rental income: In a recent survey, 38% of newbie buyers say the opportunity to rent out a portion of their home while they’re living there is very or extremely important to them. If you’re counting on rental income to help pay the mortgage, a modest starter home may include only one bathroom, making it hard to rent outside of a roommate situation.
May need more repairs: While any home can require repairs, starter homes that are less expensive than other homes in the same market could need repairs or updating. In addition to making changes to reflect your personal style, you may have to pay for improvements and repairs you hadn’t planned on, especially if it’s an older home where maintenance has been deferred.
Additional moving costs: Think you’ll be ready to upgrade in just a few years? There are costs associated with buying and selling a home: title insurance, inspections, brokerage commission, along with a handful of loan fees. It might be more cost-effective to save and stretch for the larger house, so you can stay in it longer.
More expensive homes build more wealth: A recent National analysis — which grouped homes into three tiers based on their values — found that year-over-year appreciation for starter homes was 4.4% in February 2020 compared to 2.9% for the most expensive homes. A year later, all three tiers had appreciated at about the same rate — 10% (9.8% for starter homes and 9.5% for the most expensive homes). In a scenario where all homes are appreciating at the same rate, buying a more expensive home could build wealth faster since any growth would be based on a higher amount.
In areas where homes in all tiers are appreciating at the same rate, buying a more expensive home could build wealth faster since any growth would be based on a higher amount.
It’s worth noting that growth is not guaranteed, and you should buy a home only if it’s right for you.
What to look for in a starter home
A good starter home, while temporary, should still provide you with some of the same comforts as a forever home.
Comfortable monthly payments: You may get pre-approved for a more expensive mortgage than you can comfortably afford. While starter homes generally cost less than a typical single-family home, you can use an affordability calculator to estimate the mortgage amount that will work best with your budget. I’m always available too in order to discuss your current scenario as it relates to a purchase, foreign exchange, there are many important factors to consider.
Sensible location: While the floorplan and home features are important to consider, starter homes are often in less-desirable locations with fewer amenities. You want your starter home to be near things you care about. Think about the home’s distance from family, friends and daily conveniences like groceries and work/activities that you frequent.
Meets future needs: Nationwide research shows that 35% of moves are linked to momentous life events, such as marriage, the arrival of children and job changes. If any of those are on the near horizon, you might consider whether a starter home will be a good fit for your future self.
Low maintenance: Sure TV shows make fixer-uppers look fun, but are you prepared to make the needed upgrades/renovations and cover the additional costs that comes with them? Many times its what they do not televise that is the most important, its always fun to glamorize results but all too often, things take a turn for the worse and can land you in a trouble spot quickly with little resolve.
Resale value: According to real estate economists, a typical buyer plans to live in their home for at least four or five years. If you buy a home and its value grows during that time — a possibility but not a guarantee — you could regain the money you spent to buy it when you sell it. Typically, those costs amount to 2%-5% of the purchase price. That estimate has been largely different in the 2021 market and 2022 market as I stated relating to the housing shortage.
How to buy a starter home:
Think you’re ready to buy a starter home? Keep reading below for steps to take, and be sure to talk with me about your home buying needs, so that I can help guide you to a home that’s a good fit.
Get pre-approved for a mortgage
Compare mortgage rates from at least three different lenders
Search for available starter homes
Make an offer
Schedule an inspection of the property
Apply for a home loan
Check that the home appraisal matches or comes above your offer price
Purchase a homeowners insurance policy
Close on the home