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Dr. Don Taylor, CFA, Bankrate.com advice columnistDeciding between building and buying a home

Dear Dr. Don,
We are trying to decide whether to buy an already built home or to build one. The basic question I have is this: If the cost of an already built home is $600,000, and the cost to buy land and build the home was also $600,000, which is typically easier to get financing (qualify) for, or is there any difference?
Thanks,
-- Ted Turnkey

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Dear Ted,
The comparative ease of financing the home really shouldn't be the decision variable in choosing between the two homes. That assumes you aren't building the home yourselves. Self-build projects are, in fact, harder to finance and could influence your decision on buying versus building a new home.

A popular program for a new build is construction-to-permanent financing. The advantage to this loan program is that there's only one closing, so you don't have the expense of closing on the construction financing and then closing on the permanent financing. The cost of the land can be rolled into the loan so you don't need a separate land loan. 

The biggest drawback with construction-to-permanent financing is being able to enter into a rate lock on the permanent financing that is both competitive and long enough to take you through the construction of your new home. The longer until occupancy, the more expensive the rate lock, and if the rate lock expires before you can convert to permanent financing, you're taking on a large amount of interest rate risk. You should also consider buying a rate lock that has a lock-and-float option in case mortgage rates head lower while your home is being built.

Talk to a lender or two that offers construction-to-permanent financing to get comfortable with this loan program and what rate lock options they offer. That should improve your confidence that financing the home isn't the key variable -- it is getting the house that best meets your needs and what you're looking for in a home. 

If you think mortgage rates are headed higher, then being able to finance at today's lower rates, either by buying an existing home or entering into a rate lock on a construction-to-permanent financing, can reduce your interest expense over time.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Aug. 30, 2006
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