Deflating the biggest myth about starter homes

Photo: MJ/TR

Many people are eager to "stop throwing away money on rent" and want to buy a home as soon as possible, even if they can only afford a home that they expect to outgrow in a few years. They hope that they'll later make enough money on the sale of this "starter home" to have a down payment for their next home.

But buying and selling a home incurs thousands of dollars in transaction costs. People also tend to overlook that home ownership comes with expenses that renting doesn’t, such as insurance, taxes and property maintenance. These expenses can run you thousands of dollars a year.

By renting instead of jumping into home ownership prematurely, you might accumulate more savings and be in a better position to buy that long-term family home.

Buying a home could also affect your income and career prospects. Owning a home decreases job flexibility, so upwardly mobile young professionals might be better off renting so they can easily move for a better opportunity. Also, anyone whose job is at risk and who might gain better job prospects by relocating could be in a better financial position by renting and keeping their options open. Those unemployment checks don't make much of a dent in the monthly mortgage payment.

So many variables affect how much you’ll spend on home ownership that it's impossible to state that buying a starter home categorically does or does not make financial sense. But it's often presented as being a good idea no matter what.

Some variables are determined by choices you make, but others depend on market forces that you have no control over and a future you can’t predict. If your timing is right, a starter home can be a winning proposition. But if your timing is wrong, you could end up underwater and unable to move. You could also find yourself paying thousands of dollars to get out of your starter home and into a home that's large enough to start a family.

Find out more about why buying a starter home doesn't make sense for everyone in my article,
Deflating the biggest myth about starter homes.

Save money by refinancing into a shorter-term mortgage

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If you want to refinance your existing 30-year, fixed-rate mortgage, your first thought is probably to refinance into another 30-year home loan. But with interest rates so low, you should also take a look at refinancing into a 15-year, fixed-rate mortgage. Here are the major differences between the two options.

When you refinance into a 30-year mortgage, you’re basically starting over. If you aren’t that far into your mortgage, you’ve mostly been paying interest. True, you are starting over with a somewhat smaller principal balance (as long as you aren’t doing a cash-out refinance), but you’re back to having 30 years of mortgage payments ahead of you. Despite this drawback, you could save in the long run if your new interest rate is significantly lower than your old one, especially if you keep your mortgage for a long time.

But there might be a better option. Learn more about it in my article, Save money by refinancing into a shorter-term mortgage.

A settlement statement helps you compare estimated, final costs

Photo: Ken Doerr

Before you close on a mortgage, you’ll need to make sure the final costs of the loan are in line with the estimates you were given when you applied.

That’s where the settlement statement comes in.

A settlement statement, also called a HUD-1, is a 3-page form that shows your actual closing costs when you sign your loan papers and finalize your mortgage. This line-by-line itemization of costs allows you to see exactly where your money is going when you close on a mortgage. It’s used both for home purchases and refinances.

Learn how you can use this form to make sure you're not getting cheated at the closing table in my article, A settlement statement helps you compare estimated, final costs.