You have decided that you are ready to buy a home. Now you need to choose whether this property will be the first of many – a starter home – or the only one you will ever need – a forever home.
What is the difference between a starter home and a forever home?
A starter home is one that you plan to own for a short period before buying another home. While a forever home is the only home you plan to buy.
Home Features
A starter home takes you out of renting and into home ownership, with the expectation that you will later move to another home. It may not be perfect – perhaps it’s a bit far from your workplace, or it only has one bathroom, or it needs updates. Since you don’t plan to live in it permanently, these drawbacks may not be a big deal.
On the other hand, a forever home is the only one you plan to buy. This means you should find a home that meets both your current needs and future needs. If you plan to get married, have kids, or work from home, you should consider how these decisions will affect your need for features like outdoor space, additional bedrooms, and nearby schools. While you can renovate an old kitchen over time, you cannot change the location of your home.
Cost
Cost is perhaps the biggest difference between a starter home and a forever home. Because starter homes often need some TLC or renovations, they are usually cheaper than newer, larger, or more luxurious homes in the same area. Buyers who plan to stay for a few years might be more willing to overlook some flaws or may have a plan to improve them.
Since a forever home needs to meet your future needs, it may be newer or larger than what you need right now. For example, a couple may consider buying a forever home with four bedrooms because they plan to have children in the future, but they will likely spend more than they would on a home that is just enough for them.
Note: The difference in cost also affects the size of the down payment you will need to purchase a forever home versus a starter home, as well as the likelihood of needing to pay private mortgage insurance (PMI). After all, it will be easier to save 20% of the lower purchase price rather than 20% of the higher price.
Mortgages
If you plan to move from a starter home after a few years, an adjustable-rate mortgage (ARM) might be a good option. An ARM starts with a low interest rate, which becomes variable after a certain period. If the introductory rate period aligns well with how long you expect to own the starter home, an ARM could be a good choice as you can sell your property before the rate increases.
Those searching for a forever home might prefer to choose from the start a fixed-rate mortgage for 30 years, where rates won’t change. Although this type of mortgage may come with a higher interest rate than the introductory rate of an adjustable mortgage, it will remain stable over time, while the rate on an adjustable mortgage can go up. If you plan to own your home for decades, you might prefer the predictability of a steady payment.
Incentives
First-time buyer programs offer benefits such as reduced down payment requirements, down payment assistance, and special interest rates. Programs vary from state to state, and many have specific requirements regarding income and credit history. Additionally, many programs set a maximum purchase price, so you may need to take that into consideration while looking for your home.
In
Many cases, incentives continue throughout the loan period. If you buy a forever home, that’s great – you can enjoy the benefits for years or decades to come. However, if you bought a starter home, you will lose the program’s advantage when you sell it and move to another property.
Note: Depending on your program’s terms, you may need to repay some or all of the assistance if you sell the home within a certain number of years. Before enrolling in a first-time homebuyer incentive program, be sure to read all the details carefully.
Equity
Perhaps most importantly, the money you pay towards a mortgage builds equity in the home. Whether you bought a starter home or a forever home, putting money into your own property means you’re building your own equity, rather than paying rent and building the landlord’s equity.
Equity is built not only by paying off your mortgage but also when your home’s value increases. For example, in 2021, home values saw a historically high increase over the year, with homeowners selling their properties for an average of $85,000 more than their purchase price. This $85,000 is equity, and this kind of value increase is why real estate is considered a good investment (though there is always the chance that property values could decrease).
The opportunity to start building equity early is a particularly compelling reason to choose a starter home rather than a forever home if it would take significantly longer to save the money needed to purchase the latter. Every year you wait before buying is a year you’re not building equity. And when you sell your first home, you can use your equity to help finance the purchase of your next property. If you bought a starter home, you’ll benefit from this option earlier than if you chose a forever home.
Starter Home vs. Forever Home: Which is Right for You?
So how do you choose between a starter home and a forever home? Ultimately, it’s a personal decision, and everyone’s situation is different. For example, one person may consider buying a downtown apartment as a starter home, while someone else may see that apartment as their ideal forever home. It all depends on your perspective and plans.
Let’s take a look at some factors that might help you choose one option over the other.
When a Starter Home is the Best Option
If you’re eager to start building equity in your own investment as soon as possible, a starter home may be the best choice for you. Because starter homes are typically less expensive, they may attract buyers wanting to take advantage of low-interest rates by purchasing early rather than waiting.
A starter home can also be a good option if you’re unsure what your life will look like in five or ten years. For example, while you hope to have several children in the future, you might not currently have kids – so you may not necessarily need those extra rooms right now. Or perhaps you love living in the city in your twenties but see yourself moving to the suburbs by your forties. Buying a starter home means you can focus on your current needs instead of
Source: https://www.thebalancemoney.com/starter-home-vs-forever-home-5217448
Leave a Reply