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Home > Home Buying Tips > The Benefits of Buying a Smaller Home First

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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