The Pros and Cons of Buying a Starter Home

starter home

It was typical for baby boomers, when they were young, to buy a modest, small “starter home.” As their families grew and careers advanced, they moved into bigger, better homes. Today, many people struggle to come up with the down payment for a first home. Not surprisingly, they may wonder if it’s smarter to hold off instead. Save more money, so they can buy a home that makes more long-term sense. Or, do they buy a starter home to get a foothold in the market? Here are the pros and cons of buying a starter home.

Pro: It helps you become more ‘stable’

One surprise benefit for most people is the stability they feel when they become homeowners. They might feel more grounded and part of a larger community. After making a few cosmetic changes to make a home “theirs,” many new homeowners find they enjoy nesting at home, having friends over, and enjoying their own space.

Pro: Build equity sooner

Although not the guarantee it was a generation ago, odds are good that when you get into your first home, you can realize some equity. If you can commit to at least five to seven years, there’s a chance you can come out well ahead. By making improvements that add value, you can take the equity you’ve built and apply it as a down payment on the next home. In essence, the starter home might help you purchase your dream home down the road.

Pro: The tax benefits

When you own a home, the interest portion of your monthly mortgage payment can be tax-deductible, dollar for dollar against your income.  If you spend $1,000 per month on mortgage interest, at the end of the year, you can deduct $12,000 off your taxes. But when you rent, the money goes to your landlord. The sooner you own, in theory, the faster you can save some money—perhaps toward your next home.

Con: Buying twice means moving twice

Think you’ll be ready to upgrade in just a few years? It might be more cost-effective to save and stretch for the larger house, so you can stay in it longer.

Although mortgage rates are low, there are costs associated with buying and selling a home: title insurance, inspections, brokerage commission, along with a handful of loan fees.

Plus packing up and moving twice can be expensive and exhausting. Some prefer to pick one house for the long haul. While staying put and continuing to rent may seem wasteful in the short term, it might be a more strategic move.

Con: You may spend more than you planned

Property taxes and mortgage payments aren’t the only expenses to owning. You’ll need to furnish your new home, purchase window coverings, and pay for landscaping improvements. You’ll probably want to paint, refinish the floors, or change the carpet before moving in. And you’ll surely make mistakes along the way by hiring the wrong contractor, making a poor landscaping decision, or mistakenly waiting to install the new AC condenser. Bottom line: Some parts of homeownership are trial and error and the costs can add up.

Con: Homeownership isn’t a sure thing

The world moves at a faster pace today, and that affects home values. Just a generation ago, people stayed closer to home, got married earlier, stayed married forever, and kept the same job through retirement.

Today, people choose to stay single longer, and may even purchase their starter home solo. Divorce rates are higher, the global economy moves people all over the world for work, and we prefer to stay more mobile.

That means homeownership may not be part of the equation. What happens if you buy your starter home and then get a job transfer, divorce, or the opportunity of a lifetime to live abroad? You might be stuck being an accidental landlord or selling your home at a loss.

If the conditions are right, a starter home makes sense

If you play your cards right, you can get into the starter home sooner rather than later and make a smart financial decision. If you buy the right first house, are open to building sweat equity, and plan to hang out there for five to seven years, there’s a good chance you’ll have made a smart move.


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