If you’re in the market to buy a home, you may be wondering: Should you purchase a starter home to get into the market now, knowing you may outgrow it in a few years? Or, should you stretch your budget — or spend more time saving — to get a “forever home” that will take care of your long-term needs?
Here are some factors to consider as you weigh whether to get a home best suited for the short term or the long haul.
First-time homebuyer factors
Market conditions: Mortgage rates are historically low, but there’s no telling how long that will last. Also, many real estate markets nationwide are booming; consider whether to jump in before home prices get even higher, or whether they may weaken.
Where you want to live: Consider if you’d be OK living for a few years in the suburbs, where you might be able to find something more affordable, or if you’d rather try to snag a home in a different area where you want to live long-term.
How much house you can afford: It ultimately comes down to how much money you have saved and how much you can afford to spend on a monthly mortgage payment.
Homebuyer programs to help with financing: Find out if you may qualify for a homeownership program that could help you save on your home loan. There are about 2,500 programs available across the country that could help you save on your down payment or closing costs, or provide tax credits.
What kind of house you want: For a starter home, you might go for a small home, a condo or townhouse in an up-and-coming area. If you’re thinking forever home, a single-family home with land to build an addition later could be a better fit — but it’ll be more expensive.
The costs of getting out early: If you choose a starter house now, and you end up getting married or having kids or needing to move quickly, you may face penalties, such as capital gains tax. You should talk with your tax professional about that.
Now, let’s dive into the details on what else you need to think about.
Starter home considerations
Your lifestyle: Do you want to be in the middle of a big city, or are you fine with the ’burbs if that means you can own a home? If you want to live centrally, where real estate is most expensive, you’ll probably have to start small. What if you could only afford a 1-bed condo somewhere and regret being near your friends. Consider what you’re willing to sacrifice, both in terms of location and size.
Your future needs: Many first-time home buyers assume they’ll be in a home much longer than they actually are. She says young, single people sometimes don’t realize how quickly life can change. A job switch, new relationship or new baby can alter what you need in a home.
So, if your life is full of flux and you think you would stay in your starter home for only 1 1/2 to 3 years, it may be less stressful to keep renting until you’re ready for something large enough to meet longer-term needs.
Capital gains taxes: If you set out to buy a starter home for the short term, be careful, Bull says. If you sell soon after moving in, you may owe capital gains tax on your profit from selling the home. That means you may want to think carefully about buying a home you’ll grow out of in less than two years. Consult a tax professional to see how this could affect you.
Consider an exit strategy: If you’re considering going the starter home route, you should think through from the start how you’ll offload it when the time comes to move. For instance you might buy a property that you could rent out to cover your mortgage, especially during times of economic uncertainty. This helps ensure you can cover your mortgage payment if you need to move ASAP, or if the market is weak when you hope to sell but you don’t want to take a loss.
You should also carefully research the area in which you’re looking to buy, and confirm “there’s enough resale potential to make sure that even in a market that’s heading downward, you still have a likelihood of being able to get out of where you are.”
Forever home considerations
Interest rates: If you decide to wait so you can afford a forever home, there’s a chance interest rates could increase from their current historic lows. You might be able to save additional funds in the next few years, but at that point, interest rates will have risen, and your mortgage will be more expensive. Nobody can predict what will happen, but it’s important to keep a pulse on mortgage rates.
Hot markets: In many major cities such as Boston, property values are rising rapidly. There’s also a lot of uncertainty as to whether home values will plateau or keep going up, leaving first-time home buyers wondering if they should give in to the feeding frenzy. If you wait in hopes of saving for a larger home, it’s possible prices will rise faster than you can save.
Your cash flow: Considering your lifestyle and life events it is important to do the math and check your cash flow.
If you want a forever home, you have to ask yourself whether you can afford the larger down payment, and whether your salary supports a higher monthly mortgage payment. It’s key to create a budget and to carefully track what you save and spend and to be sure you can afford a more expensive home. Don’t assume your salary will be higher in a few years and go for a bigger mortgage. And don’t forget to factor in higher ongoing expenses like property taxes and homeowners insurance.
Don’t stress too much
Making the decision between a starter home and forever home is a major move, but don’t fret too much about making the wrong decision. Remember, there are always options — you can sell, you can rent, you can put yourself in a position where you can go out and buy another house.
For more information about what you qualify for today and building your entrance strategy, call us.