The hardest questions are the ones with no right or wrong answers. Here’s a tough one that you’ll face as a first-time home buyer: Should you buy a starter home to become a homeowner as soon as possible or wait until you can save enough to afford a forever home?
Some buyers get stuck here, but you don’t have to. Going back to the basics — your budget and goals — will help clear the way to move forward.
Here’s what to know and how to think through the decision.
What is a starter home?
A starter home is a condominium, townhome or single-family home that a first-time buyer can afford but may outgrow. Typically small and modest, starter homes serve the basic needs of many homeowners and are generally on the lower end of the price range in their local real estate market. They can be older homes, fixer-uppers or brand-new, entry-level houses.
A starter home probably doesn’t feature every amenity you dream of having someday, but it’s a good-enough home for the foreseeable future.
Some buyers opt for starter homes with the goal to move up to bigger, more expensive or better located homes later. Others end up owning their “starter homes” for the rest of their lives.
» MORE: Tips for first-time home buyers
What is a forever home?
A forever home is one that will meet your needs for many years. Forever homes come in all sizes and styles. There’s no standard for what a forever home looks like or how much it costs because everyone has a unique vision of how and where they’ll live in the decades to come. A forever home could be a fixer-upper that a buyer plans to renovate into a dream home in their favorite neighborhood, or a rambling house where a couple who’s planning a family can raise their future children.
Forever homes aren’t necessarily luxurious, but they usually provide room to grow in a neighborhood where you want to sink roots.
Starter home vs. forever home
Deciding whether to settle for a starter home or wait for a forever home is a balancing act. Consider the benefits and drawbacks of each:
Because starter homes tend to be on the lower end of their market’s price range, saving for a down payment may take less time. That could enable you to buy and start building home equity sooner than if you waited until you could afford a forever home. Ideally, by the time you’re ready for a bigger house, you can sell the starter and apply the equity you’ve gained toward the next purchase.
Buyers often outgrow starter homes. They get married or have kids, or want more room for entertaining, hobbies or home offices. Buying another home will require selling or renting out the starter, paying closing costs on another mortgage and dealing with the stress and expense of moving.
With a forever home, you can settle in for the long haul, enjoy extra space and, unless something unforeseeable happens, not think about moving for a long time. You can fix up the house the way you like, without worrying about pleasing potential buyers several years later.
A forever home often costs more than a starter home, so it could take longer to save for a down payment, which could postpone buying and building equity. By the time you’ve saved more money, home prices and mortgage rates may have risen, putting a forever home out of reach again.
Tips for making a smart choice
Here are some things to keep in mind when weighing whether to buy a starter or forever home.
Spend only what you can afford
First, figure out what you can afford. Then, let that guide your decision. A good rule of thumb is to spend no more than 28% of your gross monthly income on home-related costs and no more than 36% on debts, including your mortgage, credit cards and other loans.
To determine how much you can afford, consider your monthly income and expenses, credit profile and savings to cover a down payment and closing costs. NerdWallet’s home affordability calculator can help you get started.
Plan to own any home for at least a few years
Shopping for a forever home naturally involves long-term planning. But buying a starter home requires thinking ahead, too. The longer you own the home, the better the chance that rising home values and the equity you’ve built will exceed the costs to buy and sell, including the mortgage closing costs and real estate commissions.
Selling too soon could make you subject to a capital gains tax if the home appreciates in value. Usually you can exclude up to $250,000 ($500,000 if you’re married and filing jointly) of capital gains on real estate. But typically the exclusion disappears if you owned the home for less than two years or didn’t live there for at least two years in the five-year period before the sale.
» MORE: Buying a house in 2020
Consider resale potential
It’s a good idea to think about long-term value anytime you buy a home, especially a starter home that you plan to sell in several years. Well-maintained homes in good locations have a decent shot at appreciating. Work with your real estate agent to find homes with good resale potential.
You may also want to think about the value you can add to a home. Buying a fixer-upper can be a savvy way to score a bargain, but you’ll want to make sure you understand the extent and cost of renovations before making an offer.
Keep ‘forever’ in perspective
A house that will satisfy your needs forever is akin to the perfect dream home — an elusive target, especially for a first-time buyer. Take some pressure off the purchase.
Forever isn’t really forever when it comes to real estate. Jobs change, families grow and shrink, tastes alter. Think “long-term” instead of “forever,” and good-enough versus a perfect home.
Like most things, homes don’t always fall squarely into an either-or category. Your first home may be somewhere on the spectrum between bare-bones starter and happily-ever-after forever home. So keep an open mind, and have fun shopping.