Should I buy a starter home now or just keep saving?

Posted by  on Sep 24, 2012

Q: Here's my dilemma. My wife and I figure our savings and income are about five years away from buying the kind of house we want to live in long-term. However, I look at mortgage rates now and it looks like a once-in-a-lifetime opportunity. In our situation, does it make sense to get into a "starter house" now, and then upgrade to a long-term house when we are ready?

A: The idea of using a starter house as a stepping stone to something bigger and better makes the most sense if you are able to build up a decent amount of equity during the time you are in the starter home.

Of course, the way mortgages are structured, you build the least amount of equity in the first years of a loan, so building equity can come slowly at first. To check the particulars, run some scenarios on a mortgage calculator:

  1. Have a loan calculator figure out the amortization schedule for a mortgage at today's rates, in the amount of a starter home you'd be able to buy now. Then, look at the first five years of the loan. Compare the equity you would build up over that period with the amount you'd save if you didn't buy a home, over and above the rent you are now paying (assuming you are currently renting). This will tell you if you can build potential equity to roll into your next home faster by renting or buying. Be sure to also include things like closing expenses.

  2. Also use a mortgage calculator to see if you could go to a 15-year mortgage to buy a starter home. This would not only get you a lower interest rate, but shorter-term mortgages build equity faster, so your interim purchase would be more productive.

If you don't buy now, keep running different scenarios as your savings build. Depending on how conditions develop, you may find you can get into a long-term home sooner than you think.

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