The decision to buy a home is an important one. There’s the fun part where you pick paint colors and room layouts, and then there’s the scary part where you figure out how to pay for it all. The questions will be endless: Is it better to rent or buy? How much house can I afford? What should my down payment amount be? Should I get a starter house — or wait until I can afford my “forever house”?
Many first-time buyers find themselves asking these questions as they compare houses and their prices in the market. Of course, the answer depends upon your personal situation and financial goals for the home but it’s important to consider what you need the home to do for you and how much time you have.
The housing market is hot again in many parts of the country, with median home prices increasing by approximately 4 percent year over year. So let’s say you’ve been thinking about a house purchase, and now might be the right time to make it happen. But home prices are on the climb, and you’re wondering if now is the time to pull the trigger.
As important as it is to find the right home for your needs, it’s even more important to buy at a realistic price that you can afford. That’s why we want to help you decide between buying a starter house right now vs. opting for a forever house later.
Here are some pros and cons of each option.
The starter home
Acquiring a starter home doesn’t always have to be a work in progress. You don’t always have to a fixer-upper, just because that’s your budget. Sometimes you can find a place that’s move-in ready and just needs a little TLC here and there. Today, more than 61% of first-time homebuyers have a budget of less than $250,000 (that’s for the whole house) according to the National Association of Realtors’ 2017 Home Buyer and Seller Generational Trends Report.
Home prices are rising. And though homes are increasingly expensive, you can still buy something cheaper. It’s all a matter of weighing your priorities and capabilities. Sure, you could live in a four-bedroom house … but is it really necessary? What would you rather have: A bigger home or more flexibility with debt and cheaper rent?
By tapping your creative side, some elbow grease, and a few helpful hints from real estate experts, you can turn your starter home into your personal castle.
A starter home is perfect for buyers who want to live for a while, make sure they can handle homeownership, and upgrade to a bigger house or something else later. If you’re looking to buy a home in the near future, you should probably develop a short-term plan, as it may be cheaper to buy than rent.
Therefore, put your energy into paying off the mortgage on the starter home as quickly as possible. That gives you a nice payoff point about three years down the road — and it leaves your next move more flexible.
The forever home
Home prices have increased in the past couple of decades. Depending on the market, home prices may have doubled or tripled. The median U.S. home price is now over $200,000 according to Zillow, and some markets — such as San Francisco — may have home prices over $1 million.
This is a big problem. The dream of owning your own home is one of the cornerstones of the American Dream. However, it’s one that fewer and fewer young people can afford to make come true. As it stands today, only 36 percent of adults in their late 20s own homes, compared to 51 percent in 1995.
When you find a forever home, you will get to experience the joy of decorating it. Maybe there will be a garden, an extra room for the kids, or maybe there’s a deck for entertaining guests. But it is very much possible that you can’t afford the down payment. And by the time you have saved enough down payment, the house prices and mortgage rates may have risen even more.
Though the real estate market is forever changing, in the long run it may be harder to get that dream home of yours if you don’t get your foot in the real estate door while the mortgage rates are at their historic low.
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