Stater Home or Forever Home
Which One is Right for You?
The home buying process requires a lot of decisions, and one of the most important is what type of house you want to buy. For first-time buyers this question may be a bit more complicated. Are you going to dip your toes in the real estate market with a lower-priced starter home or are you looking for something more long-term.
Starter home versus forever home
Generally speaking, “starter homes” are smaller and serve basic needs for many first time home buyers. They are usually on the lower end of the price range for a local real estate market.
On the other hand, a forever home is one that you can imagine living in for a very long time, possibly forever. The home may be located in a preferred school district, it may have more square footage, and it will probably have more of the features you want in a long-term home — a bigger kitchen, a larger yard, more bedrooms, etc.
While these are common characteristics, REALTOR® Erin Klinger with The Laforet Team of Coldwell Banker Hubbell BriarWood says buyer behavior is changing and that means these definitions may also be shifting.
“Homeownership used to begin a lot earlier in life, so for young buyers just starting out, they needed a lower-priced, transitional home,” she said. “Today, I see a lot of first-time buyers in their 30s and even older. Many of them saw what their parents or older siblings went through during the housing crash, and it made them a bit more cautious. They waited, saved, and are approaching their home purchases a bit differently.”
Klinger says because these buyers waited to purchase, and because they can take advantage of today’s low interest rates, many are bypassing the traditional starter home, and are focusing on something they can grow into.
“And the concept of a forever home is changing as well,” she said. “It used to be more of a status symbol — larger, higher-priced, great location, higher-end features, etc. But there has been a lot of change over the past couple of years and priorities are shifting. A forever home today may mean something that is comfortable, manageable, and affordable.”
Determine your goals and budget
So, as a first-time buyer, how do you know if you should buy a starter home or spend a bit more and go with a forever home? Klinger says the answer will be different for everyone.
“It starts with determining your short- and long-term goals,” she said. “What is your lifestyle now and where do you see yourself in the next 5-10 years? You obviously can’t predict the future, but you will need to do a bit of forward thinking.”
Your financial situation will also be a big factor in your decision-making process. Starter homes typically have a lower price tag, which also means a lower down payment. However, today’s low interest rates mean buyers can possibly borrow more.
Just keep in mind that the general rule of thumb is that you shouldn’t spend more than 28% of your gross monthly income on housing expenses if you have a conventional mortgage. This includes mortgage payments, homeowners insurance, property taxes, HOA fees, etc.
Some lenders may still approve your mortgage if you go above that 28% mark, so Klinger says it’s important to set your budget before you head to a lender.
“The amount you are pre-approved for and what you can actually afford may be two different numbers,” she said. “A lot of reputable lenders will ask borrowers what they are comfortable spending each month and then work backwards to help determine a purchase price.”
Pros and cons
We already mentioned that starter homes tend to be more affordable, so for budget-conscious buyers it’s a great opportunity to get into a home and start building equity. And, as a bonus, you don’t necessarily have to sell your starter home once you’re ready to move-up. You can rent it out in the future as a passive stream of income.
However, buying a starter home means you’ll eventually have to go through the process of buying another home and selling your current one (unless you rent it out). Also, remember that mortgage rates are at all-time lows. When you buy your forever home in a few years, they may be higher. If you went with the forever home now, you could lock in that rate for the life of your loan.
When it comes to the benefits of a forever home, many people enjoy the feeling of being settled. You can make updates and improvements to the home without worrying as much about resale, and a forever home will also likely have plenty of space for the future and be in a more preferred location.
Of course, there are some drawbacks. As mentioned, forever homes tend to be more expensive, which means a higher down payment and closings costs. A larger home also often requires more maintenance, which costs money. If you aren’t in a position right now to cover the costs of a more expensive home, and you aren’t willing to go the starter home route, you may have to put your buying plans on hold.
Still not sure what to do? Set up a consultation with a local REALTOR®. They can talk you through the process, answer all your questions, and help discuss all the pros and cons.
“As a REALTOR®, I think of myself as an advisor, not a salesperson,” said Klinger. “I want to dig deeper with my clients and understand their why. Why do they want to move? Why do they want this area or this type of house? Understanding the why not only helps me to guide them, but it also helps them make wise decisions and investments.”
For a list of local agents, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.