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Starter Home vs. Forever Home: Which Should You Buy?

When it comes to purchasing their first home, buyers often wonder: Do they buy a starter home or a forever house? Several factors come into play when deciding between the two, but your budget will likely be the biggest driver. Here’s how to decide whether to buy a starter home versus a forever house.

What is a starter home?

A starter home is usually the first property a homebuyer will purchase. These homes are typically priced at the lower end of the market. Fannie Mae also defines a starter home as a property that has less than 2,000 square feet of floor area.

“A starter home is basically a stepping stone for buyers,”  said Carrie George, a real estate agent based in Kremmling, Colo. ”They can purchase a home, build some equity, sell it and move into something that is better suited to their needs.”

Here are some key characteristics of starter homes:

  • They’re more affordable than larger, newer homes. (Starter home prices will vary by market.)
  • They could include single-family homes, townhomes and condos.
  • They’ll likely require more work than the average property.
  • They’re harder to find in competitive housing markets with limited housing inventories.

What is a forever house?

A forever house is usually a home you’ll stay in for many years. Forever houses also tend to be bigger than starter homes, so you’ll have enough space to grow into it over time.

A forever home (also called a dream home) typically checks off most of the items on your wish list. As you can imagine, forever homes are also more expensive than starter homes. And that means it could take longer for first-time buyers to afford their ideal dream home.

Should I buy a starter home or wait?

As you weigh the decision to buy a starter home now or wait, you’ll have several factors to consider. Here are five of them:

  1. Your budget. The average price to buy a home varies widely by area. Ultimately, your budget will determine how much house you can afford and what type. A starter home might be best if your budget is modest and you don’t have much money saved.
    Keep in mind that your monthly mortgage payment includes more than principal and interest; you’ll pay property taxes, homeowners insurance and mortgage insurance (if you put less than 20% down). Plus, you’ll need to have money set aside from home maintenance, repairs and emergencies.
  2. Home-price appreciation. If home values in the area you want to move to are rising, a starter home may appreciate in value over time. When you’re ready to finally buy a forever home, that price appreciation and, in turn, your equity, can help you move up.
  3. Housing market conditions. In much of the U.S., low inventory is making for difficult housing market conditions. In November, housing inventory levels fell 5.7% from the previous year, according to recent data from the National Association of Realtors (NAR). The housing inventory crunch is hitting entry-level price ranges the hardest, NAR found. If you can afford it, you may want to think about buying a forever house to sidestep the fierce competition.
  4. How long you plan to stay. The length of time you plan to live in your home is another consideration in your home search. On average, it takes four years to recoup the upfront costs of buying a home, according to Betterment, an investment advisory service. Unsure how long you’ll stay? Choosing a less expensive starter home may be best to minimize your losses.
  5. Interest rates. If you’ve been asking yourself, “How long should I wait to buy a house?,” look at current interest rates. In a lower-rate environment, lower rates help ease housing affordability pain. But if rates increase, borrowing costs go up, too, making it harder to buy a forever home.

Pros and cons of buying a starter home vs. waiting to buy a forever home

Not sure what to do? Here, we break down the benefits and drawbacks of buying a starter home versus waiting to buy a forever house.

Starter home
Pros Cons
Less expensive than larger or newer homes Home features may not meet all of your criteria
You’ll build equity now May be an older property that requires work
Reap tax benefits Fewer options to choose from in competitive markets
Home-price appreciation can boost your return on investment You may outgrow the home and need to move again
Forever home
Pros Cons
Meets most of your criteria More expensive than starter homes, which could strain your budget
You’ll likely stay put longer You’ll pay rent (and build equity for someone else) while you save for a forever home
Can accommodate a growing family May be more expensive to maintain and repair
Ability to potentially customize it You might have to stay longer to recoup your initial investment

How to find starter homes for sale

Finding the right entry-level price ranges can be tough in a competitive market. Here are some tips to find a starter home for sale near you.

Keep your wish list simple

When you’re searching for a starter house in a tight market, keep your wish list simple. Narrow down your absolute must-haves, but be flexible about other items — especially cosmetic issues. Search for homes in more than one area, and don’t discount condos and townhomes. Finally, opt for neighborhood and home amenities over cosmetic appeal.

“I always tell my clients to focus on finding a home with the right number of bedrooms and bathrooms,” George said. “You can change a lot about a home, but some things are harder than others.”

Stick to your budget

The last thing you want is to become house poor and buy more house than you can afford. While a preapproval letter will tell you the maximum amount a bank is willing to lend you, your budget may not be able to handle that monthly payment.

Instead, use a mortgage calculator to calculate different prices and monthly payments until you find an amount that’s in your comfort zone. In addition to monthly debt payments, don’t forget to tally up monthly bills that lenders don’t look at: utilities, healthcare expenses, daycare/school tuition, insurance, gas and food.

Don’t overlook homes that need work

Buying a new home versus an old home is often a matter of price. If you’re on a budget, buying a fixer-upper now gets your foot in the door and your costs in check. Plus, you may be able to roll rehabilitation costs to buy a fixer-upper into your mortgage with a home improvement loan. This could be a win-win scenario.

Work with a real estate agent

An experienced real estate agent can help guide you through the homebuying process. An agent can accompany you on house tours, handle seller negotiations and help you with any relevant paperwork. More importantly, a knowledgeable, professional agent will advocate for your best interests.

Act fast

When you do find a starter home you love, you’ll need to move quickly. Often, these types of homes don’t stay on the market for long and you could find yourself in a bidding war with multiple buyers vying for the same home. Getting preapproved before starting your home search will help you put your best foot forward when it’s time to make an offer.

 

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