Consider the pros and cons of buying a starter home vs a forever home and learn if a starter home is right for you.
When the Baby Boomer generation was venturing into adulthood, buying a starter home — a modest, small residence — was a common practice. As their families grew and their careers advanced, many moved into bigger or better homes.
Today, the ability to work remotely has opened up more options and opportunities for home ownership in more affordable areas. If you’re a first-time home buyer, you may be wondering whether a starter home is right for you. Should you buy a starter home in a suburb that’s more affordable? Or spend a little more on a larger, forever home?
What is a starter home?
A starter home, or starter house, is a short-term, small dwelling that first-time home buyers usually purchase because of its affordability. The typical starter home is currently valued at $170,289 nationwide as of January 2023.
A starter home typically has one to two bedrooms with one bathroom and roughly 750-1,250 square feet of space. The home usually serves the basic needs of the homeowner. They are great for first-time homeowners who aren’t ready to commit to a residence long-term. Homeowners usually only live in a starter home for three to seven years or at least long enough to see a return on the investment.
What is a forever home?
A forever home is a house you can see yourself living in for a long time. About double the average price of a starter home (the U.S. Median Home Value for a single-family home is $357,319), forever homes are also much larger in size with about 2,000 square feet of living space, three bedrooms and two baths. Generally, forever homes are best for homeowners who are looking to settle for at least 10 years and want a space that can evolve with upcoming life-changing events like having kids. You like the location, you have a stable job, and you don’t have any plans of moving in the near future.
Starter home vs forever home pros and cons
Home ownership is a personal choice, and there is no one right path to take. Stick within your comfort zone, weigh what’s best for your circumstances and future plans, and trust your gut.
Pros
Smaller down payment: Starter homes are typically the most affordable option for home ownership. When you buy a home, you have to put down a certain percentage toward the purchase price. The percentage, called a down payment, varies widely. Starter homes typically require a smaller down payment, since they’re less expensive. You can expect to put down about $5,100 to $34,000 (3-20%) on a $170,289 starter home.
Lower monthly payments: Because the down payment is smaller on a starter home, you’re able to save more quickly and put a larger percentage toward the purchase price to pay down the principal — lowering your monthly payment amount. A smaller home also tends to mean lower carrying costs like utilities, property taxes, and insurance.
Less upkeep: A smaller space means less to maintain, and it can also mean saving money on fewer furnishings. You’ll also likely save time on chores like cutting the grass, cleaning, or removing moss from a roof.
Build equity sooner: Getting into an affordable home sooner means you could start building equity sooner if your home continues to appreciate. For about the past five years, starter homes appreciated faster than homes valued in the middle and top tiers.
A 2021 Zillow analysis — which grouped homes into three tiers based on their values — found relatively more demand for starter homes in Midwest metros including Cleveland, Detroit and Indianapolis, and a faster rate of appreciation for starter homes there compared to more expensive homes.
However, in other areas, including Boise, Charleston and Dallas, home values in all tiers are appreciating at about the same rate (see below for more).
May be easier to sell: Zillow research shows that starter homes in the low-to-middle price range sell the fastest. (The very least expensive homes take longer to sell, likely because they’re in need of repairs.)
Cons
More competition: Because starter homes are among the most affordable homes, they are often the most sought-after. In competitive markets, where buyers outnumber sellers, you could be in for a prolonged search or a stressful bidding war.
Harder to generate rental income: In a recent Zillow survey, 31% of first-time buyers say the opportunity to rent out a portion of their home while they’re living there is very or extremely important to them. If you’re counting on rental income to help pay the mortgage, consider the space you’re working with. A modest starter home may include only one bathroom, making it hard to rent outside of a roommate situation.
May need more repairs: While any home can require repairs, starter homes that are less expensive than other homes in the same market could need repairs or updating. You may need or want to make changes to reflect your personal style. Or, you may have to pay for improvements and repairs you hadn’t planned on. This is especially the case if it’s an older home where maintenance has been deferred.
Additional moving costs: Think you’ll be ready to upgrade in just a few years? There are costs associated with buying and selling a home: title insurance, inspections, brokerage commission, along with a handful of loan fees. It might be more cost-effective to save and stretch for the larger house, so you can stay in it longer.
More expensive homes build more wealth: A Zillow analysis — which grouped homes into three tiers based on their values — found that year-over-year appreciation for starter homes was 4.4% in February 2020 compared to 2.9% for the most expensive homes. A year later, however, all three tiers had appreciated at about the same rate, 10%. In a scenario where all homes are appreciating at the same rate, buying a more expensive home could build wealth faster since any growth would be based on a higher amount.
In areas where homes in all tiers are appreciating at the same rate, buying a more expensive home could build wealth faster since any growth would be based on a higher amount.
For example, the value of a typical starter home in February 2021 was:
- $141,832 for the starter tier
- $272,446 for the mid-tier, and
- $537,815 for the priciest group
If each tier grew by 10% in a year, a typical starter home would gain:
- $14,183 in equity
- the mid-tier home would gain $27,245
- and the top tier home would be worth $53,782 more
It’s worth noting that growth is not guaranteed, and you should buy a home only if it’s right for you.
What to look for in a starter home
A good starter home, while temporary, should still provide you with some of the same comforts as a forever home.
Comfortable monthly payments: You may get pre-approved for a more expensive mortgage than you can comfortably afford. While starter homes generally cost less than a typical single-family home, you can use an affordability calculator to estimate the mortgage amount that will work best with your budget.
Sensible location: While the floorplan and home features are important to consider, starter homes are often in less-desirable locations with fewer amenities. You want your starter home to be near things you care about. Think about the home’s distance from family, friends and daily conveniences like groceries.
Meets future needs: Momentous life events, such as marriage, the arrival of children and job changes often inspire a need to move. Are any of those are on the near horizon? If so, you might consider whether a starter home will be a good fit for your future self.
Low maintenance: Sure TV shows make fixer-uppers look fun, but are you prepared to make the needed upgrades/renovations and cover the additional costs that comes with them?
Resale value: According to Zillow economists, a typical buyer plans to live in their home for at least four or five years. If you buy a home and its value grows during that time — a possibility but not a guarantee — you could regain the money you spent to buy it when you sell it. Typically, those costs amount to 2%-5% of the purchase price.
How to buy a starter home
Think you’re ready to buy a starter home? Talk with your agent about your home buying needs. They can help guide you to a home that’s a good fit. Here are more home buying steps to help you prepare:
- Get pre-approved for a mortgage
- Compare mortgage rates from at least three different lenders
- Search for available starter homes
- Make an offer
- Schedule an inspection of the property
- Apply for a home loan
- Check that the home appraisal matches or comes above your offer price
- Purchase a homeowners insurance policy
- Close on the home