NewBuyer Blog

6 Reasons a Starter Home Might Not Be the Place to Start

Posted by Elizabeth Dennis on December 29, 2009 | 2 Comments

The History of the Starter Home
The concept of starter homes came into being during the post-World War II era as many young families sought to fulfill the American Dream by owning a home. William Levit, known as the Father of American Suburbia, made those dream come true when he initiated the idea of mass-produced, affordable, stand-alone homes.  He initially built over 17,000 homes in what became known as Levittown, NY.  Lenders provided low cost, government-backed loans to the homes’ buyers; many of whom would not have otherwise been able to afford a place of their own.  As a result, the starter home was born and its appeal still exists today.

The Modern Day Starter Home
Today’s typical starter homes are small, one or two bedroom houses that are often older homes or homes in low-cost developments.  The advantages of a starter home are many.  First time home buyers who are willing to scale down their dreams in terms of size, location, and amenities are rewarded with lower down payments, mortgage payments, insurance premiums, and utility and maintenance costs. If all goes well, the home will appreciate in value and the buyers will have built suitable equity in their starter home.  The equity along with the money saved as a result of the lower associated costs will be the ticket for first time home buyers to someday (hopefully soon) move up and purchase their forever home.

Why a Starter Home Might Not Be a Good Idea
The advantages of buying a starter home appear quite attractive.  However, let us take a look at why a starter house may not be the house for you. By the nature of a starter home, you will most likely have plans to graduate from the house after a relatively short period of time. Perhaps you plan to upgrade when your family grows, when you secure that “great” job, or when your children start in the public school system.  Whatever the reason, you will be selling your home early on during the life of your home loan.  There are a few reasons why this may end up costing you.

1. Price of the Home
   The cost of a smaller starter home does not drop proportionately to its size; much of the value is in the land.  This is especially true for homes in desirable neighborhoods.  You may end up paying more than the perceived value for a small or older home.
   
2. Home Buying Costs
   There are significant costs each time you buy a home, including a whole new set of closing costs, commissions, moving expenses and more.
3. Mortgage Terms
   Your mortgage may be subject to pre-payment penalties if you pay off the loan early, typically within the first three to five years of the loan.  Pre-payment penalties may be presented to you as an option in exchange for a lower interest rate.  You may be tempted to accept this offer but do so with extreme caution.  Remember, this is your starter home and odds are you will want to move sooner rather than later.   At the very least be prepared for the fees.  If you have not agreed to a pre-payment penalty, make sure to carefully review the truth-in-lending statement to confirm the pre-penalty terms listed are accurate.
4. Home Renovations
   To make a starter home functional and comfortable, you may decide to renovate or add on to the house.  While generally, upgrades to major areas of the home like kitchens and bathrooms are smart moves, will you be in the home long enough to re-coup these renovation and remodeling costs?  You could put the house on the market for a few thousand dollars more than the comparables in your neighborhood; but will that make it harder to sell?
5. Resale of Starter Homes
   With fewer people buying starter homes, keep in mind that there will be that many fewer buyers interested in yours when you are ready to sell.
6. The Housing Market
   While a volatile real estate market is of concern to all home sellers, a cold real estate market can really put a wrench in your upgrade plans.   If your starter home drops in value, you will not have built equity as planned and you may even have to sell at a loss.  If this is the case, it may not be as easy as you had hoped to get into your forever home.

While a starter home is certainly a necessity for many first time home buyers, it may not always be the path to take for others.  Carefully consider the risks and cautions highlighted above so that regardless of the label attached to your new home (starter or forever) you can be sure you bought the house that is right for you.