January 14, 2021

Build Wealth with a Starter Home

If you want to break into the housing market but can’t yet afford your dream home, a starter home can help you achieve your homeownership goals.

A starter home, as the name suggests, is a modest home that serves the needs of a first-time homebuyer. A starter home may be a good option for you if you are a young professional or newlywed looking for a place to spend the next 5-10 years. There is no standard starter home type, but a condominium, townhouse or older single-family home could be considered a starter home. It may not have every amenity or as much space as a forever home, but the main feature of a starter home is that it’s typically more affordable. A starter home gets you in the door of homeownership.

On the other hand, a forever home is a home that you can envision yourself in for the next 20-30 years. Features of a forever home will include more of your wants versus your needs, like a big back yard for example. Every household will have their own vision of what a forever home looks like, but it should be a place you are comfortable planting roots.

With the strong buyer competition in today’s market, you may wonder if it makes sense to skip the starter home. While there are pros and cons to waiting to buy, holding out on homeownership until you can afford your forever home could postpone your opportunity to start building wealth sooner.

Here are three financial benefits of purchasing a starter home.

1. Starter homes are more affordable

With today’s mortgage rates at historic lows, it may make financial sense for you to purchase a home now rather than continue to rent. If you are willing to be flexible on your starter home’s features or location, you will likely be able to find a more affordable home. With a more affordable home, it will take you less time to save for a down payment. Plus, by locking in a low mortgage rate, your monthly mortgage payments will be smaller.

2. Starter homes can help build wealth

Buying a starter home allows you to build wealth sooner rather than waiting to buy later. A starter home helps you build wealth in a few ways:

  • Home Equity. Equity is the difference between the current the amount you owe on your mortgage and what your home is worth. Equity is built by making regular mortgage payments towards your loan principal. The more equity you have in your home, the more of it you own.
  • Home appreciation. Appreciation is the positive change in value of your home. While there are no guarantees, in a strong market well-maintained homes have a good chance of appreciating over time. Your home can also appreciate as you make updates or renovations to it.
  • Tax benefits. Homeowners may be able to take tax deductions which could save money and help build financial stability. Use our tax deductions calculator to estimate your potential savings.

3. Starter homes are a long-term financial asset

Purchasing a home is a big investment. Ideally, by the time you’ve outgrown your starter home, you will have significant equity, which will come back to you when you sell it.  Another option, if you have the financial means, is to keep your starter home and rent it as an additional income source.

A starter home can give you experience in owning a home and the financial benefits that come with it, without the pressure of finding your forever home immediately.  For more information about buying a home, visit My Home by Freddie Mac®.