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Starter homes are smaller and more affordable than forever homes.
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A starter home is one you’ll stay in for a few years; a forever home is one you’ll live in long-term.
Even if you aren’t ready to settle down, a starter home is a good tool for building equity.
A forever home is more expensive, but it’s a worthwhile purchase if you plan to live there for a long time.
The homebuying process requires you to make a lot of decisions. One of the most basic (but most important) questions to ask yourself is what type of home you want to buy. Should you buy a starter home or a forever home?
What are starter homes and forever homes?
A starter home is a place you don’t plan on living in forever. You’ll probably stay for five years or less. Maybe you’re planning on moving once you have kids or get a job in another city.
A forever home is a home you plan to live in for a long time, possibly for the rest of your life — you can see yourself living there forever. It could be larger and have features like a back deck, large outdoor space, or extra storage if you know you’ll get use out of these over the decades.
Sometimes starter homes are more affordable than forever homes, because they’re smaller and have fewer amenities. But that isn’t always the case — you could buy a modest forever home or buy a fixer-upper that you will make more lavish over time.
The bottom line: You may want a smaller, more affordable starter home if you plan to move in the next few years, and a forever home if you want to settle down long term.
The pros and cons of buying a starter home
Pros
Affordability. Starter homes tend to be less expensive than forever homes.Buy sooner. You might not need as much money for a down payment, so you can afford to buy earlier.Investment property. You don’t necessarily have to sell your starter home once you’re ready to move. You can rent it out as a passive stream of income.
Cons
Smaller. Usually, starter homes are smaller and more modest than forever homes.Selling. Buying a starter home means you’ll eventually have to go through the hassle of buying another home later and selling this home (unless you decide to rent it out).Interest rates. Mortgage rates are high right now. If you take your time and save for a forever home, rates could be lower later.
The pros and cons of buying a forever home
Pros
Interest rates. Although rates are relatively high right now, rates could be even higher if you wait to buy. There’s no guarantee about which way mortgage rates will go.Settle down. You can make as many changes to the home as you want, and a larger forever home has plenty of space for the future.
Cons
Expensive. Because forever homes are usually larger and nicer than starter homes, they also cost more money.Wait to buy. You might not have enough money right now to cover the down payment and closing costs for a more expensive home.Lack of flexibility. You’re buying this home with the mindset that you’ll be here for a long time, so you’ll want to be sure you don’t plan on moving within the next few years — if you move too soon, you may actually lose money.
How to choose between a starter home and forever home
Think about your budget
Figure out how much house you can afford right now. How much can you afford to borrow? When buying a house, the general rule of thumb is that you should spend 28% or less of your gross monthly income on housing expenses if you have a conventional mortgage. This includes your mortgage payments and any other monthly house-related expenses.
Some lenders will still approve your mortgage application if housing expenses would make up more than 28% of your income. Just think about how much you’re comfortable spending on housing.
When calculating your housing budget, take the following into consideration:
Mortgage payments (including the principal and interest)Homeowners insuranceProperty taxesHomeowner’s association dues
You’ll also want to have at least three to six months’ expenses left in an emergency fund after closing.
Figuring out your budget will help you know whether a starter home or forever home is in your price range right now.
Ask yourself when you plan to move again
If you plan to move in the next few years, a starter home is probably the better purchase. If you want to stay in a home for decades, it could be worth it to buy your forever home.
Why? Because if you spend tens of thousands of dollars on an expensive forever home and move just a couple of years later, you could actually lose money. You wouldn’t have paid down much of your mortgage, and your home wouldn’t have had time to appreciate before you sell it.
Nail down your goals for buying
Do you want to build some equity rather than spend money on rent? A starter home could be enough for you.
Do you want to settle into a home for the long term? It may be time to buy a forever home.
There’s no clear right or wrong decision when it comes to buying a starter home or forever home. It comes down to which purchase would help you meet your goals.