How long should you own a starter home?

Starter homes are great for first time home buyers. While they can tend to come in lower socio-economic areas or require a bit of a fixer upper, they can be a great investment and a great way to enter the housing market.

The case against starter homes

A lot of people invest in smaller homes as their starter homes, like townhomes or condos. While this can seem like a great idea at the time, you should really only invest in property if you plan on staying there for at least 5 years.

Typically, when first time home owners buy their first home, they have a renting mindset. They are used to yearlong leases, and may have a harder time grasping the concept of longevity in a house. After about three years most people tend to start looking for larger properties.

Staying in a house for at least five years, can help you see more of a return on your investment. Moving after three years of owning a home can tend to lose you money, unless you’re planning to keep the property as a rental property.

Consider closing costs. Every time you buy and sell a home you have to pay closing costs. While these costs may be small compared to the overall price of a home, it’s still money that you lose every time a housing transaction is made.

The way most mortgages are structured, you pay more interest in the first five years. So spending only five years in a home can be a waste of your resources. After five years, you usually have made enough progress on the principal amount due, to justify paying a mortgage rather than just rent.

The case for starter homes

People tend to invest in as much house they can afford, which generally isn’t much. It’s usually in the upper end of what your finances allow, which stretches you thin. If you consider buying in the lower range, and not spending as much money a month on your mortgage, you have the chance to pay off a bigger chunk of your principal amount owed.

Purchasing a starter home is completely up to you and what your finances allow, but consider whether you truly consider your home a starter home or whether it’s an investment that you want to make and commit to for years to come. Consider what you can afford and what you’d like your monthly payments to be, what you want to be financially responsible for. If you want more flexibility and may not want to stay in the home for a long time, buy on the lower end of your budget. It gives you the chance to pay off the home faster, giving you more leverage when you hit the housing market the next time.