How to choose between buying a starter home and a forever home

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• A starter home is one you'll stay in for a few years; a forever home is one you'll live in long-term.
• Even if you aren't ready to settle down, a starter home is a good tool for building equity.
• A forever home is more expensive, but it's a worthwhile purchase if you plan to live there for a long time.

The homebuying process requires you to make a lot of decisions. One of the most basic (but most important) questions to ask yourself is what type of home you want to buy. Should you buy a starter home or a forever home?

What are starter homes and forever homes?

A starter home is a place you don't plan on living in forever. You'll probably stay for five years or less. Maybe you're planning on moving once you have kids or get a job in another city.

A forever home is a home you plan to live in for a long time, possibly for the rest of your life — you can see yourself living there forever. It could be larger and have features like a back deck, large outdoor space, or extra storage if you know you'll get use out of these over the decades.

Sometimes starter homes are more affordable than forever homes, because they're smaller and have fewer amenities. But that isn't always the case — you could buy a modest forever home or buy a fixer-upper that you will make more lavish over time.

The pros and cons of buying a starter home

The pros and cons of buying a forever home

How to choose between a starter home and forever home

Think about your budget

Figure out how much house you can afford right now. How much can you afford to borrow? When buying a house, the general rule of thumb is that you should spend 28% or less of your gross monthly income on housing expenses if you have a conventional mortgage. This includes your mortgage payments and any other monthly house-related expenses.

Some lenders will still approve your mortgage application if housing expenses would make up more than 28% of your income. Just think about how much you're comfortable spending on housing.

When calculating your housing budget, take the following into consideration:

• Mortgage payments (including the principal and interest)
• Homeowners insurance
• Property taxes
• Homeowner's association dues

You'll also want to have at least three to six months' expenses left in an emergency fund after closing.

Figuring out your budget will help you know whether a starter home or forever home is in your price range right now.

Ask yourself when you plan to move again

If you plan to move in the next few years, a starter home is probably the better purchase. If you want to stay in a home for decades, it could be worth it to buy your forever home.

Why? Because if you spend tens of thousands of dollars on an expensive forever home and move just a couple of years later, you could actually lose money. You wouldn't have paid down much of your mortgage, and your home wouldn't have had time to appreciate before you sell it.

Nail down your goals for buying

Do you want to build some equity rather than spend money on rent? A starter home could be enough for you.

Do you want to settle into a home for the long term? It may be time to buy a forever home.

There's no clear right or wrong decision when it comes to buying a starter home or forever home. It comes down to which purchase would help you meet your goals.