Millennials, Is It Time to Sell Your Starter Home?

According to research from The Motley Fool Motley Fool Money, more than half of millennials (those of us born between 1981 and 1996) are homeowners today. If you are one of them, you might be considering upgrading from your starter home to your forever home. Maybe you need more space for kids (or your growing comic book collection; no judgment here) or you bought in an area that was awesome in your 20s but isn't so great in your 30s or 40s.

The good news is that home prices have increased in recent years, so your house is likely worth more than you paid for it. That means selling your starter home could give you a solid down payment for a new home.

But is now the right time to sell your starter home? Before you call a listing agent, there are a few factors you'll want to keep in mind.

Mortgage rates are still high

If you were lucky enough to purchase a home between 2019 and 2021, you might remember that mortgage rates were between 2% and 3%. Lower interest rates mean you pay less over time, and it also means your monthly payment is lower.

For example, if you purchased a $350,000 home, put 20% down, and had a 3% interest rate, your monthly payments would be around $1,625. (Taxes and home insurance rates can vary a bit.) At 7% interest, the same home would have an average monthly payment of $2,307. You can use a mortgage calculator to play with the numbers.

So, in addition to paying more over the life of the loan, upgrading your home is likely to result in taking on a much bigger monthly payment -- even if the cost of the house is similar.

Inventory is increasing, but still low

In March 2024, the inventory of unsold listings was 14.4% higher than the same month in 2023, according to the National Association of Realtors. This means inventory is starting to increase, though it remains low. Low inventory (meaning fewer houses are on the market in general) tends to lead to higher prices and less choice.

Fewer choices may mean settling for a house that isn't exactly what you want. Is it worth giving up a low interest rate for a home that doesn't check every box? Only you can answer that question. If you have four kids crammed in a 1,000-square-foot starter home, a house that checks most of your boxes might be worth the higher payment.

But if you're mostly satisfied with your current home (or have the option to make changes to make it work), it might be worth staying put for a few more years to see if inventory increases.

You might have to pay back first-time home buyers assistance

Did you use a first-time home buyer assistance program to purchase your starter home? If so, make sure you know how that impacts your ability to sell.

For example, if you used down payment assistance from Your Choice! Down Payment Assistance in Ohio, the funds are only forgiven seven years after the purchase. This means selling that starter home might cost more than you realize. Sell before the seven years are up, and you'll have to pay it back.

Most programs for first-time home buyers have a similar requirement, so make sure you know what to expect if you used one to buy your current house.

Should you stay or should you go?

Is now the ideal time to sell a starter home? The reality is it depends on your situation. With higher interest rates and lower inventory, now is not the ideal time to buy, so it's best to try and make your current home work. While mortgage rates are unpredictable, they're unlikely to go back to pandemic-era lows any time soon.

If your current home is simply no longer working for you, there are ways to lower your monthly payment. Compare rates from different lenders to find the best one for a new home. And don't forget to explore your options for cheaper homeowners insurance to give yourself a bit more breathing room.