Should You Buy a Starter Home Before Buying Your Dream Home?

Mason Whitehead, at Churchill Mortgage, shares his experience in this featured guest article.

Many regions have high home prices, but loan rates are still low. Many first-time homebuyers are unsure if they should buy a less expensive home now and enhance it later, or if they should invest in their permanent home now and know they'll be there for many years. In this article, I'll go through some of the benefits and drawbacks of these options to help your site visitors make the best decision for their financial and personal conditions.

I am 42 years old, and I’ve owned four primary residences.  I also own land now that I intend to build a new primary residence.  In the purchase of the last two homes and now the latest build I am currently working on I have said that this is our “last home” until our daughter graduates high school.  

When I bought the first home, she was two years old.  When I purchased the next house, she was seven, and now is 13 while we begin the new build process.  So, odds are this next one may be the last one before she graduates.

The reality is that most people are in their homes for about 5 to 7 years.  That’s the statistic in the industry, and it’s been true for me, as well.

Now, I’ve been fortunate that in each case, I could buy at a certain price and sell the home for more later – but sometimes, I had to rent it out for a few years while the market recovered before I could do so.  As such, real estate has always been a good investment for me; over time, it usually is for most people.

Real estate is most Americans' #1 wealth builder and is usually your biggest asset.  It’s an investment that you need to put real thought into and not be in a rush, as some websites and ads try to get you to do. 

What are the advantages of owning a home?

First, over time, homes tend to APPRECIATE.  So, ideally, your home is worth more five years later than you paid for it and in many cases, you don’t have to pay taxes on the profit you make when you sell your primary residence. (https://www.irs.gov/taxtopics/tc701)

Next, there are big tax advantages of owning a home.  It’s important to consult your CPA or tax adviser for the details but here are the main things to consider:

1) Mortgage interest is tax deductible

2) Property taxes are tax deductible

3) Mortgage insurance may be tax deductible

4) Some of your closing costs are tax deductible

It almost always makes financial sense to own rather than rent if you intend on being in the home for at least a couple of years.  

I bring all of this up based upon the initial question – should I buy a “permanent home now if I KNOW ill be in the home for many years.”  I tell clients all the time that I KNEW I’d be in each of my homes for 10+ years…and I have not been in any of them that long.  

What’s important is to buy in a great location that will maintain its value and in an area where demand will remain strong, near good schools and near good traffic arteries for commuting to work areas. In addition, you want to be near attractions people like, such as parks, ponds, golf courses, lakes etc. as is applicable or available.

The most important aspect, though, is not to stretch.  Nearly every day I remind buyers that “just because you CAN qualify doesn’t mean you SHOULD.”  Your budget and monthly payment comfort level are what should really dictate whether you buy a “starter home” or something a big bigger / nicer.  

That’s why it is important to have a great team on your side to look at the big picture for you. A team who has already been down this road personally and who have been doing this long enough to advise you well. 

Want to learn more? Reach out myself Mason Whitehead, I’m happy to answer your questions and help you!