If you want to break into the housing market, a starter home can help you achieve your homeownership goals.
As the name suggests, a starter home is a modest home that serves the short-term (5-10 year) needs of a first-time homebuyer, particularly young professionals or newlyweds. This is in contrast to a forever home, which typically includes more of your wants versus needs over a longer term (20-30 years).
There is no standard starter home type, but a condominium, townhouse or older single-family home could be considered a starter home. It may not have every amenity or as much space as you would like in a forever home, but the main feature of a starter home is that it’s typically more affordable.
While there are pros and cons to waiting to buy, holding out on homeownership until you can afford your forever home could postpone your opportunity to start building wealth sooner. A starter home gets you in the door of homeownership.
Here are three financial benefits of purchasing a starter home.
Starter homes are more affordable
Depending on your financial situation, it may make sense for you to purchase a home now rather than continue to rent. If you are willing to be flexible on your starter home’s features or location, knowing you only intend to live there for 5-10 years, you will likely be able to find a more affordable home. With a more affordable home, it will take you less time to save for a down payment and your monthly payments will be smaller than those on a more expensive home.
Starter homes can help build wealth
Buying a starter home now allows you to build wealth sooner rather than waiting to buy your forever home later. A starter home helps you build wealth in a few ways:
- Home Equity. Equity is the difference between the current amount you owe on your mortgage and what your home is worth. Equity is built by making regular mortgage payments toward your loan principal. The more equity you have in your home, the more of it you own.
- Home appreciation. Appreciation is the positive change in value of your home. While there is no guarantee your house will increase in value, well-maintained homes in a strong market have a good chance of appreciating over time. You can also increase the value of your home through updates or renovations.
- Tax benefits. Homeowners may be able to take tax deductions which could save money and help build financial stability. Use our tax deductions calculator to estimate your potential savings.
Starter homes are a long-term financial asset
Purchasing a home is a large investment. But by the time you’ve outgrown your starter home, you may have gained significant equity, which will come back to you when you sell it. Another option, if you have the financial means, is to keep your starter home and rent it as an additional income source.