Should You Buy a Starter Home or Wait to Buy Your "Forever" Home?

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Given the prices of homes these days, it’s no wonder many homebuyer hopefuls choose to get into the market by purchasing smaller, more modest homes that are on the affordable end of the spectrum. After a few years of building equity and allowing time to appreciate the value of the home, there will be a lot more capital available to put into purchasing a larger, more suitable “forever home.”

While this is certainly a viable option, there’s always the alternative to wait it out a little longer and continue to save up to eventually buy a home that is more suitable for long-term needs.

Of course, a decision like this is relative based on your particular situation and desires, but it’s worth weighing both options before deciding which one is best for you.

The Argument For Buying a Starter Home

There are plenty of reasons why you might want to get into the market sooner rather than later.

Current market conditions are favorable.

The housing market in California has been hot for a while now and isn’t showing signs of slowing down that much anytime soon. It’s true that housing prices across the Golden State are extremely high with a median single-family home priced at $550,200 – about twice what the national average is. But property values are continuing to rise quite rapidly, which means your starter home will be worth a lot more than you pay for it today. If you continue to wait and hold out to buy your forever home, it’s highly possible that prices will increase at a much faster pace compared to your savings.

Interest rates are still very low.

Since the housing crisis of 2008, interest rates have been hovering near historic lows. The rates that homeowners have been able to take advantage of over the past few years have made buying a home much more affordable. The rates are still very low today, making it a great time to get into the market and lock in at a low rate.

That said, rates are on the rise. Only time will tell how high they will be when you have saved up enough and are ready to buy the home you plan on living in for the long haul. By then, mortgage rates may bounce back to their norms, making home loans more expensive.

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You can build equity sooner.

Owning a home is somewhat like having a built-in savings account. You’re obligated to pay your mortgage every month, and every payment you make puts more money in the pot. This is called ‘equity’, and it continues to build with each mortgage payment you make.

Not only that, appreciation over time also adds to your home equity, and any improvements you make will bump it up even more. By the time you’re ready to sell and trade your starter home in for your forever home, you might have a decent amount of money to help make purchasing your next home a lot more financially feasible.

Reap the tax benefits of homeownership.

Being a homeowner comes with several perks, including tax benefits. You are eligible to write off the interest portion of your monthly mortgage payment when it comes time to pay Uncle Sam. That can add up to a few thousand dollars in savings every year. If you’re currently renting, every penny you pay in rent goes straight to your landlord. In this sense, it might make sense to get into homeownership sooner.

The Argument For Waiting to Buy a Forever Home

Before you consider buying a starter home rather than waiting to buy, consider the following first.

Save on costs associated with owning a home.

While you can certainly save plenty of money from tax benefits and build up equity by purchasing a home today, it’s still important to consider some of the costs that come with homeownership. Your mortgage payment isn’t the only financial responsibility that comes with owning a home.

There are also property taxes, utilities, homeowner’s insurance, repairs and maintenance fees, updates, furniture, and other expenses that you will have to factor in and budget for that you wouldn’t have to worry about if you were still renting. Sometimes it may be better to continue to rent and save up for these expenses that will eventually come when you buy your forever home.

No need to worry about capital gains.

If you sell your starter home after owning for a very short period of time, you could get slapped with capital gains taxes on the proceeds of the sale. As per the IRS, you can avoid paying capital gains taxes on $250,000 as a single owner or $500,000 as a married couple as long as the home was used as your primary residence for a minimum of two out of the five years that you owned it before you sell.

Think long and hard about the how soon you may decide to sell your starter home to buy one that better suits your future needs. If you think you might sell shortly after, you may be better off waiting. Speak with a tax professional to find out how you could be affected.

Your down payment will be a lot bigger.

Obviously, the longer you are able to save money, the bigger your down payment would be. If you wait it out for your forever home, the odds of you having a bigger down payment are higher, as long as you use the time wisely and save accordingly. Of course, the down payment required will likely be higher compared to what a starter home would warrant, but you may also be enjoying a higher salary by then.

The Bottom Line

There really isn’t a right or wrong choice between buying a starter home versus waiting to buy your forever home. Both options come with their own set of advantages. At the end of the day, the decision you make should be based on your specific situation, both from a financial and lifestyle point of view.

What may work for one might not work for another. To help you make this decision, it doesn’t hurt to have a chat with your local real estate agent to get a feel for the current market in your area and where the housing market is expected to be in the years ahead. The answers you get just might sway you in one direction over the other.