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Pros & Cons of Buying A Starter Home

June 28, 2019 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Pros & Cons of Buying A Starter Home

It’s a common description in real estate listings: “Lovely starter home!” But just what is a starter home? Is it some kind of secret real estate agent code that really means the house is exceedingly tiny, needs a lot of work or has no amenities?

A starter home is, for the most part, what the name implies—the first home a starter home buyer can afford to purchase. It’s a phrase often used to refer to modest one or two-bedroom homes that are affordable for young couples or professionals just starting out.

The median list price for starter homes hovers around $89,000 , and closer to $180,000 near America’s largest metro areas. The number was up 11% from the previous quarter, but it’s still a price that’s not likely to scare away potential homebuyers on an entry-level salary. And in recent data from the National Association of Realtors® ®, 75% of respondents said that, whether they currently own a home or not, home ownership is a part of their American Dream.

As with any large financial decision, it’s important to do your homework — especially if it’s your first foray into real estate.

The Benefits of Buying a Starter Home

Becoming a homeowner can bring stability to life. This could be especially comforting for tenants who aren’t sure of their landlord’s plans for the property they’re leasing. A starter home comes with a transitory feeling of “good enough for now” that for some buyers is just the right amount of commitment without feeling stuck in the long term.

It’s also a great way to try on the other aspects of homeownership that renters take for granted, like fixing your own broken appliances and mowing your own yard. And the larger the house, the more work it usually brings.

Buying a starter home is also an investment that could see good returns down the road. While you live in the home, you’ll be putting monthly payments toward your investment instead of your landlord’s. Depending upon market conditions, you’ll likely have potential income when you decide to trade up, either through the equity you’ll gain when you sell or recurring income if you choose to turn it into a rental property.

In addition to putting your money toward what is hopefully a future gain, you can possibly put some of that mortgage interest payment right back in your pocket thanks to tax deductions for homeowners.

You may be able to deduct up to $750,000 ($350,000 if married filing separately) in mortgage interest and up to $10,000 ($5,000 if married filing separately) of your state and local real estate taxes each year. In some states, a homestead exemption gives homeowners a fixed discount on property taxes and other benefits. Consult your tax advisor regarding your particular home loan financing.

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The Downside of Starter Homes

While the idea of a home just big enough for two is a romantic one, the reality of finding a starter home that’s actually affordable seems to be getting tougher.

Recent price and inventory research revealed that over the past six years, starter home inventory is down 14.2%, prices are up 57.9%, square footage is down 2%, and the number of homes needing work is up 8.3%.

The current outlook is so bleak, especially around some larger cities, that some millennials are opting out of the starter-home market altogether, choosing instead to rent longer or live with their parents, save money, and jump right to their forever house — still the American Dream, but a drastic departure from what’s always been considered traditional.

We can’t blame millennials for taking a different approach to homeownership than their parents. The older members of the generation came of age during the financial crisis of 2008-09 , which included a housing bubble burst that put many of their parents — and even some of them — under water on a mortgage they may not have been able to afford in the first place.

Another con of buying a starter home that you know won’t be permanent is the prospect of having to go through the entire home-buying process again — this time while trying to sell your starter home, too.

Keeping your house show-ready, paying closing costs, going through the underwriting process, packing, moving and trying to time it all so you avoid living in a hotel for a while is a big (sometimes painful) undertaking that, when compared to the relative ease of moving apartments, can be seen as not worth the effort. If you are not ready to jump into a starter home, an alternative could be a rent to own home.

Should You Buy a Starter Home?

If you’re tired of renting or living at home, but don’t have the cash flow necessary for anything more than a modest place, a starter home could be a great way to get into real estate without breaking the bank.

Before you buy any home—starter or otherwise—it’s important to sit down and crunch the numbers to see how much home you can realistically afford.

Lenders look at your debt, but they aren’t privy to your other monthly expenses, such as child care or kids’ activities. While a 20% down payment isn’t required any more to purchase a home, most non government home loan programs do require some down payment.

In addition, putting down less than 20% means that you may have to pay private mortgage insurance (PMI). The decision to purchase a starter home is about more than just money, though. You may also want to consider your future plans and how quickly you might grow out of the house, whether you’re willing to live where the affordable houses are, and if you’ll be happy living without the amenities you’ll find in a larger house.

Other factors to consider are your current state of financial wellness, and your mental readiness for a DIY lifestyle (which includes your willingness to fix your own leaky toilet.)

If you’re ready to take the leap to home ownership, SoFi mortgage loan offerings can help make your dreams a reality with as little as 10% down, and no hidden fees.

Learn more about SoFi mortgage loans today.

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