Should Your First Home Be a Starter Home or Forever Home

For your first home, is it better to buy a temporary starter home or the home you'll want to live in forever?

Buying your first home can be confusing. On the one hand, it can be tempting to stretch your budget to the limit and start off by buying the house of your dreams. On the other, you may be better off settling for something more modest and then trading up in a few years once you've become more established financially.

Just because you can get the home you've always wanted right away doesn't mean you should. To weigh the pros and cons of starter homes and forever homes, and to determine which option may be right for you, consider the following:

Immediate Affordability
Buying a less-expensive starter home may be less stressful financially if you have only a limited amount saved for a down payment. You may also be able to avoid having to pay for private mortgage insurance if it means you'll be able to put down at least 20 percent of the purchase price.

If you're anticipating an increase in your earning power in the coming years, however, paying a little more to buy a home you'll want to live in for the long-term may be well worth while. You may want to consider a mortgage such as a hybrid ARM that offers a lower initial payment for a fixed number of years before resetting to an adjustable rate mortgage.

Long-Term Payoff
When housing prices are on the rise, buying a starter home can help you get your foot in the door of the real estate market. It allows you to build up some equity and hopefully resell your home for more than you paid for it. However, if the value of your property drops, you could end up living in your starter home for longer than expected or having to sell it at a loss, thereby reducing your chances of getting the home you really want.

You may be better off paying more for the home you really want now than hoping you'll be able to squeeze some resale cash out of your starter home later on. Also, housing prices have recently come down nationally, and mortgage rates are still low, so now may be a good time to buy that home you've been dreaming about.

Future Renovations
If you don't plan on staying in your starter home for more than a few years, renovations may end up costing you in the long run. Small improvements, such as a new deck or landscaping, may add to your home's resale value. But spending a great deal on major improvements may make it harder to recoup all the money you've invested. And, if you end up listing your home for a few thousand dollars more than a similar home down the street, it may make it harder to sell.

If you do decide that you want to stay in your starter home for a long period of time, then it may make perfect sense to renovate. Over time, you can remodel it to suit your family's evolving needs, eventually creating the house you wanted all along.

Family Growth
Starter homes are typically small houses that don't leave much room for an expanding family. But what if your situation changes suddenly before you can afford a new home? You may be forced to sell and move before you are ready to do so.

Purchasing a larger home to start off with may work well if you're planning to have kids within a few years. The downside is that, if you pay significantly more upfront and have higher mortgage payments, you may find it more difficult to support a growing family on less disposable income.

Cost of Living
Many first-time homeowners focus only on the down payment and underestimate how much it actually costs to live in a home. Some of the benefits of a starter home include lower utilities, maintenance bills and property taxes, and, after a few years of coping with those expenses, you will have a greater understanding of what living in a larger home will cost.

Buying a larger, forever home usually means all these cost-of-living expenses will be higher. However, purchasing one home, instead of two, will also mean paying only one set of closing costs and being able to reap all the benefits of any money invested back into renovations or additions.

There's no one right home-buying decision. The important thing is to take your time and consider all of the various available options. Buying a home is a serious financial commitment. You want it to also be one that will bring you joy for many years to come.

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