A Financial Guide to Buying a Home

Rule #2

Skip the Starter Home

Keate Barker

Keate Barker

Old-Think: Always begin with a starter, something small you can easily afford. You can trade up later.

New-Think: Buy a home that works for your family right now -- and will do so for years to come. Maybe you'll want to upgrade at some point, but you shouldn't absolutely need to. "It's impossible to describe how much better off you will be at every step along the way if you wait to buy a desirable home in a good school district instead of a starter that has no advantage except that it's cheap," says Steinmetz. Starter-home prices rise only when the real estate market is strong, and they can be hard to unload during economic downturns. If you buy such a home when prices are still at or near historic highs and the market weakens, your family could find itself sitting on an asset that's losing value.

Are there situations when a starter house makes sense? Yes: when it's a truly great deal. Maria Ibanez, a telecommunications administrator, and her husband, Alberto, a sales representative, just successfully traded up from their one-bedroom co-op in New York City to a three-bedroom Tudor in Palisades Park, NJ, where they now live with their two children, ages 3 and 1. Their secret? They bought their first home out of foreclosure proceedings. (In cases of foreclosure, a bank or other lending institution takes possession of a home, usually because the owner has failed to keep up with mortgage payments; the bank then sells the property, often at a deep discount, to minimize its losses.) A starter may also work if your rent is so high that you're able to find a comparable deal on a small house.

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