Everyday decisions
A starter home is two decisions, not one cute house
A starter home is a two-move plan: buy a smaller place now, sell it in a few years, and buy again. It can build equity and a foothold in a market. It also pays the costs of buying and selling twice, in the very years when a mortgage pays down the least principal.
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Early payments are mostly interest
On a 30-year loan, the first years' payments go mostly to interest. On a $288,000 loan at 6.5 percent, four years of payments reduce the balance by only about $14,200, while interest takes about $73,100.
The equity a starter home builds over a short stay therefore comes mostly from price growth, not from the payments.
Two sets of costs
Each purchase brings closing costs, and each sale brings agent fees, transfer taxes, and the repairs a buyer asks for. A starter plan pays them twice before the household reaches the home it wanted.
Add the moving costs, twice as well, and the cost of the time each search takes.
When a starter home works
A starter home makes sense when the stay is long enough, when prices in that market rise steadily, or when rent is well above an owner's spent costs. It can also work when the house could become a rental later, provided you truly want to be a landlord.
The starter plan in a Decision Room
Buying the starter, renting until one longer-term purchase, and stretching for the longer-term home now each get their own Champion. The Challenger presses on the planned length of stay, since 'three years' is a prediction. The room works the sums exactly from your price, rate, and costs. Grandfather asks what happens if the second move comes later than planned, or a slow market makes the starter hard to sell.
What to weigh
Costs of two transactions
Closing, agent fees, and moving, each paid twice.
Equity at the sale date
Principal paid plus any price growth, after selling costs.
Stretch risk
For the bigger house now, how the payment holds up in a lean year.
Time to the right home
How long each path takes to reach the place you want to stay.
A $320,000 starter, sold after four years
A household can buy a $320,000 starter with 10 percent down at 6.5 percent, a payment of about $1,820 in principal and interest, and expects to sell after four years. Buying costs about $9,600 and selling about 7 percent, $22,400 if prices are flat: $32,000 in all, more than twice the $14,200 of principal the payments retire. That principal is savings either way, since a renter paying the same total each month could bank it. So with flat prices, and owner costs that match rent, the starter trails renting by the full $32,000. Prices need to rise about 2.6 percent a year for the sale to cover those costs, and at 3 percent the starter comes out about $5,400 ahead. The Verdict names that growth rate as the deciding prediction and asks what local evidence supports it.
Questions
- Is a starter home a bad idea?
- Not in general. The answer depends on how long you stay, how prices move, and how the owner's costs compare with rent, and your own figures usually make it plain.
- Should I buy the bigger house now instead?
- Only if the payment survives a lean year. The room scores that stretch as its own option, with its risk stated plainly.
Further reading
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