Why do people buy houses they don’t plan to pay off? Most people don’t spend their entire lives paying off one house, so what is the financial benefit of getting a “starter home”? I’m new to the economics of real estate and I’ll take any wisdom offered.
In: Economics
Let’s say you have two choices – rent an apartment, or buy a $400,000 starter home. You’re going to stay there for five years, then you’re gonna buy the $550,000 house you actually want. All the numbers below are made up and grossly oversimplified, but I think they’ll give you the idea.
**Rental scenario:**
You pay rent for five years, then you have (whatever you’ve saved up) to put toward your “keeper” house.
**Starter scenario:**
You get a $400,000 mortgage on your starter house, and make payments on that for five years. During that time your payments chew the mortgage down so you only owe $350,000. After the five years, you sell the house for $400,000. You spend $350k of that to pay off the mortgage. Now you have $50,000 that you can spend on hats…or add it to your savings for the “keeper” house.
**Ways this is oversimplified:**
* It assumes rent and the mortgage cost the same. They’re not completely different leagues, but the mortgage is almost certainly higher.
* Some (many? most?) mortgages penalize you for closing out early.
* Depending where you are, you might be able to sell your house for the same amount you paid (or more! Dare to dream!)…or you might not. Hope you took care of it. Hope the market is positive. Hope your realtor doesn’t take too big a bite for themselves.
* You have to pay for maintenance on the starter house while you’re in it. That can be no big deal, or your starter can be a total vampire if it’s old, or if you’re unlucky.
* You have to pay property tax on the starter house while you’re in it, unless you know some tricks I don’t.
* Imagine that the house you want is finally up for sale, so you put your starter up for sale…and you don’t get any offers. Time passes. You’re worried somebody is going to snap up your dream house, but you need the old house to sell so that you’ll have your $50,000 to put down on the new one. More time passes. No offers come in. You feel slightly ill.
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