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I think the idea of buying a starter home is one of the worst moves you can make financially as a younger person. Buying a starter home will likely cost you way more money in the end as opposed to waiting until you’re ready for a more high quality home. Around 70% of your mortgage payments in the first 5 years will go towards interest costs on your loan, so you build up very little equity in a starter home by the time you’re ready to move. Then you end up spending a ton of money trying to fix the place up. And when you do decide to trade-up to a nicer place you end up paying closing costs and realtor fees. In the majority of cases it will prove to be a far better move to rent for a few more years and save enough money until you can afford a nicer house. At that point the pros far outweigh the cons because of the sense of community, place to call your own and the psychic income involved.
Well, I would warn about the foolishness of trying to make general sweeping statements about something as specific and regional as the Real Estate market.
It assumes they can rent for much less then buying. That's not always true. It is true that a large percentage of their early mortgage payment is 'down the drain' in interest. Yes... but it's also true that 100% of their rent is down the drain.
If buying a starter home is such a bad idea, why are so many of our clients able to use the proceeds of their first home as a down payment on their next home?
I suppose it really depends on where you're buying a home, and what the market is like in that particular community at the time you're buying.
It probably also depends on what you consider a starter home. I don't think I would buy a 1 BR place, you'd probably outgrow it too quickly. But we bought a 2 BR starter home condo in southern California because I knew we'd be able to live there for a long time. By the time we moved we sold it for more than double what we had paid for it.
If we had rented, we probably wouldn't have been able to save for that much bigger house, because the cost of buying a place escalated, as did the cost of renting. My house payment was significantly lower than rents would have been.
The worst outcome in home ownership is being house-poor... if you can't afford to do the maintenance that it needs, the home will become a drain and a source of stress and conflict. Best advice whether buying "starter" or "nicer" is TRY to resist the temptation to buy at the absolute top of whatever you think your budget is.... because it always grows.
I think the idea of buying a starter home is one of the worst moves you can make financially as a younger person. Buying a starter home will likely cost you way more money in the end as opposed to waiting until you’re ready for a more high quality home. Around 70% of your mortgage payments in the first 5 years will go towards interest costs on your loan, so you build up very little equity in a starter home by the time you’re ready to move. Then you end up spending a ton of money trying to fix the place up. And when you do decide to trade-up to a nicer place you end up paying closing costs and realtor fees. In the majority of cases it will prove to be a far better move to rent for a few more years and save enough money until you can afford a nicer house. At that point the pros far outweigh the cons because of the sense of community, place to call your own and the psychic income involved.
Sheesh. I went through a number of layoffs after buying my "starter home" that I lived in for 20 years. If I'd had a higher mortgage payment, I'd have lost the house.
Well, I would warn about the foolishness of trying to make general sweeping statements about something as specific and regional as the Real Estate market.
It assumes they can rent for much less then buying. That's not always true. It is true that a large percentage of their early mortgage payment is 'down the drain' in interest. Yes... but it's also true that 100% of their rent is down the drain.
If buying a starter home is such a bad idea, why are so many of our clients able to use the proceeds of their first home as a down payment on their next home?
Since the interest is "down the drain," to me it makes more sense to buy a cheaper house, not a more expensive one, if that's your criteria.
I bought a 2 bed/2 bath condo for a "starter home"/bachelor pad. My PITI+ hoa is less than rent was on the apartment I lived in before here (and the rent on that place has gone up since then).
I rent out the second bedroom/bathroom which covers over 80% of my mortgage.
Only had to put 3% down on a first-time homebuyer conventional loan; market is hot enough that I was able to drop PMI last month so my payment will now actually drop by about $100.
I could sell this year (after only owning for 2.5 years) and pocket a NICE chunk of change even after transaction costs (obviously I save half of the commission because I'd just need to pay a buyer's agent; but I'd still do well even if that weren't the case). Most likely I'll stay a while longer and eventually rent the place out.
Buying this place when I did how I did is definitely the best financial decision I've ever made. And yes....I'm a millenial!
But.....that's not going to be the case for everyone. YMMV depending greatly on location and circumstances.
A couple with a baby on the way buying a studio loft because that's all they can afford in their area? Yeah probably best to rent for a while until they can afford to buy something with the space they need.
Not much "wealth of commonsense" there unless you plan to move within a very short time. There are few places where rent is so cheap you can save enough money for a down payment on that larger home sometime in the future. Even in the small town I'm in rent on a starter home is higher than the mortgage payment.
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