Deciding between building and buying a home
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?
-- Ted Turnkey
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
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."