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Jun 12

Why First Home Buyers Shouldn’t Target Their Dream Home

Many first time home buyers envision opening the doors to their dream house and triumphantly walking into their mansion. The culmination of their hard work and even harder saved dollars are embodied in this perfect piece of property.

While that is a great image to strive for, a more practical approach may be to buy a starter home like a fixer-upper or townhouse as your first purchase. It may not have been what you always dreamed of, but it could be a much smarter financial decision in the long run. In fact, it could help get you to that perfect home a little sooner.

Aside from a much smaller home loan, one of the best reasons is to build some equity that you can access when you upgrade your home later.

Many people rent for years until they have a big enough deposit for their dream home. Or they dive into a huge mortgage from the very beginning. Here are some disadvantages to each approach:

Renting: Unless you’re paying very low rent, it doesn’t necessarily make sense to fork over a sizable chunk of money every month to your landlord and try to save for a home purchase at the same time. While there are certain perks to renting over owning, the biggest drawback is that you build no equity despite all the money you’re paying.

Large Mortgage: Taking on a huge home loan and smothering yourself under that weight of debt is also a bad idea. Chances are you won’t be building any equity in the first few years of your housing payments anyway if it’s a very large loan, since it’ll mostly just go to the interest costs.

Obviously, the larger the home loan, the longer it will take before you start building real equity in your home. This is why a smaller loan for a lower priced home is beneficial.

Buying a small house to build some equity and then flipping it to buy a larger home can be very effective in saving you money in the long run. Here are some factors to consider:

• Rent: If your rent payments are favourable, it may make sense to stick around and save up extra money. Depending on the size of your loan and the current housing prices versus the rent rates in your area, it could be quite a few years before buying makes more sense than renting.

Time Horizon: A shorter mortgage allows you to keep more equity and pay less interest over time. Though the payments may be higher, you pay down the principal a lot quicker. However, keep in mind a shorter time horizon may not give you enough time to build any equity, which would defeat the purpose of buying a small home first.

Housing Market: You also have to keep an eye on interest rates and housing prices. If low prices or interest rates are offering a great opportunity, you should jump on them if you can. If they’re inflated, you can afford to wait before making your move. You also don’t want to buy if prices are likely to drop further.

Deposit: How much cash you have available is also important to how much equity you can build right off the bat. Let’s say you have $40,000 for a deposit. While that might not be enough to cover 10 percent on your dream house, it may be more than enough to do the trick for your smaller starter home.

Additional Expenses: There are extra costs that go into buying and owning a home., like settling costs, property taxes, maintenance and repairs – the list goes on. Make sure you factor these into your calculations when weighing the pros and cons of buying a home versus renting.

By not overextending yourself with a mortgage you can barely afford and still building equity over time, you are more financially flexible to buy that dream home without the added stress of a huge debt. Before making a commitment to a home loan, however, consult a financial professional to see if this strategy works for your end goal of home ownership.

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