Are Starter Homes Still a Thing?

By Dan Rafter on 25 June 2018 0 comments

The old formula worked like this: When you were tired of renting an apartment, you'd buy a starter home. This starter home would be affordable and small. When your family started to grow, you'd sell that starter home and buy a larger residence.

Does this strategy still make sense? Should you invest in a starter home before purchasing what you might consider the home of your dreams?

Not surprisingly, the answer is complicated. But in most cases, a starter home is not necessarily the best financial move. That's largely because mortgage dollars are so affordable today thanks to historically low interest rates.

This doesn't mean that buying a starter home is a bad move, just that you shouldn't consider it an essential step. Here are some reasons why a starter home isn't always necessary anymore.

It's more affordable to buy a bigger house

Mortgage rates have been rising, but these rates are still at historic lows. As of mid-June, it was still likely that if you had solid credit, you could qualify for a 30-year, fixed-rate mortgage loan at an interest rate near 4.5 percent.

When interest rates are low, it's cheaper to borrow money. It also gives you more homebuying power. You can take out a larger mortgage loan and still be left with an affordable monthly payment, which means you can purchase a home with a bigger price tag.

Just be careful: You don't want to stretch your budget too far. Only buy a home that leaves you with a mortgage payment you can afford each month, whether it's a starter home or a more expensive residence. (See also: 9 Warning Signs You Can't Afford That New House)

Down payments aren't as much of a burden

Down payments have traditionally been a challenge to homebuyers. After all, 20 percent down on a home that costs $200,000 is $40,000 — a big chunk of money. The challenge of coming up with down payments has led many first-time buyers to less expensive starter homes. The down payments for these homes are smaller.

Today, however, there are a number of programs that require buyers to come up with smaller down payments. Fannie Mae offers a program that requires just 3 percent down, while many borrowers can qualify for a down payment of 3.5 percent for FHA loans. (See also: 5 Ways to Qualify for a Mortgage With a Small Downpayment)

Buying a starter home means moving twice

If you can afford a larger home right off the bat, you'll save yourself time and aggravation by reducing the number of times you have to move.

Moving is a hassle. And it's expensive. You want to do it as few times as possible. Skipping the starter home and moving right into a larger home can help you skip at least one move in your lifetime. And if you've ever been through a big move, you know how much of a benefit skipping one can be. (See also: Don't Forget to Budget for These Unexpected Moving Expenses)

A bigger home provides you with more flexibility

If you buy a home that's a bit too large — as long as your mortgage payments fit comfortably within your budget — you'll have more space and flexibility if circumstances change down the road.

Maybe your family starts to grow, or you take a remote job and need a home office. Maybe you have frequent out-of-town guests who need to stay the night. If you buy a starter home that's barely big enough to fit just you, as soon as you need more room, you'll have to start your hunt for a new residence. With a bigger home, you'll already have the added space for a significant other, kids, guest room, or home office.

When you're touring a home, don't just consider your space needs today. If the home is offered at the right price, and your interest rate is low, think of how your family might grow and how your needs might change. Those rooms that seem like extras today might turn out be invaluable in the future.

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