The Benefits of Buying a Smaller Home First
Most first-time home buyers have a lot of expectations. It is not uncommon for first time
home buyers to dream of being able to buy their dream home. After all, this purchase
represents all of the hard work of the past few years and the sacrifices they have made in
saving the money for their first home purchase. While there is certainly nothing wrong with
striving for this type a goal, it is also important to be practical and understand that as a
first time home buyer your first home may more closely resemble a starter home that is a
fixer-upper. It certainly is not as pretty or as exciting, but it can be a much smarter
financial option in the long term. In fact, making the decision to start out with something
more modest can help you to make your way to your ideal home much sooner.
There are numerous benefits associated with owning a starter home. Beyond the fact that a
starter home typically involves a smaller mortgage, you can also benefit from being able
to ease your way into a home purchase and the home ownership process. In addition, buying
a smaller and less expensive home will also give you the benefit of being able to build equity
that you can then access later when you are ready to upgrade to a better home.
If you are currently paying rent but dream of one day being able to own a home, your best
option could be to buy a smaller home now rather than taking on a large home mortgage
or continuing to pay rent until you have saved up the funds necessary to make a down payment
on a larger home. With renting, unless you have a very low rent, it typically doesn't make
financial sense to pay a huge chunk of money each month and try to save money for a down
payment at the same time. There are some advantages to renting over owning, but the largest
disadvantage is that you do not have the chance to build equity even though you are paying
all that money each month. If you take on a large mortgage it is usually going to be a bad
idea as a first time home buyer because you end up running the risk that you will become so
buried under debt that you will not be able to handle it. In addition, with a huge mortgage
you usually will not have the chance to build up any equity during the first few years anyway
because most of your mortgage payments will go to interest.
Depending on your particular situation, buying a smaller home to help build some equity
and then later flipping it to buy a larger, more expensive home can be an effective strategy
for saving money over the long term. There are some facts you should think about when considering
whether this is the right strategy for you.
First, consider the amount of your monthly rent. If you have a reasonable rent, it could make
more sense to go ahead and continue renting so that you can save up extra money. Depending on
current housing prices and the size of your mortgage loan compared to the rental rates in your
local area, it might be awhile before it would make more sense to buy than rent.
Also keep in mind that a shorter mortgage will make it possible for you to retain more equity
and pay a lower amount of interest over time. While financing your home for a shorter period of
time will result in larger payment, you gain the advantage of being able to pay down the
principal much faster. At the same time, remember that shorter term mortgage might not give
you the chance to build equity and that can defeat the purpose of buying a smaller home.
It is also a good idea to keep a watch on housing prices and mortgage rates in your area. If
interest rates and prices are low you should take advantage of them if possible. On the other
hand, if they are, you can certainly afford to wait awhile before you buy.
The amount of cash you have available for a down payment will immediately affect how much equity
you have in a home purchase. While you might not have enough for 20% of a larger home purchase,
what you have could be just the right amount for a down payment on a smaller home.
Finally, keep in mind that there are numerous additional expenses related to buying a home
that most people never expect. Along with closing costs you should also anticipate property taxes,
maintenance and repairs and homeowner association fees. Make sure you are prepared for these
expenses and factor them into your calculations. Buying a smaller home in the beginning can
make it much easier to afford these expenses when you are first starting out.
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