If you’ve spent time looking for a house but haven’t found the perfect one, you might be wondering what it would take to build a home of your own. The cost to build a house may be lower than you think, and there are also several financing options available to help you construct a home that meets all of your needs.
How much does it cost to build a house?
The average cost to build a single-family, 2,600-square-foot home is $296,652, according to a National Association of Home Builders (NAHB) survey. This figure, however, only takes into consideration the cost of construction, and doesn’t include the cost of the lot, which averages nearly $90,000, as well as additional expenses.
As the homeowner, you’ll need to take into account a number of factors to calculate the true cost of building a home.
|Construction phase||Average cost|
|Foundation and framing||$87,000|
|Home systems (Electrical, HVAC, plumbing)||$40,000-$45,000|
|Outdoor (Driveway, landscaping)||$20,000|
|Source: National Association of Home Builders|
- Pre-construction costs: You’ll need to secure the appropriate permits and pay fees to your city or municipality before the work on your home can begin. You’ll also need to hire architects and engineers to make plans for your home. These costs all vary by location, but the average total is around $18,000.
- Foundation and framing: The structure of your new home is a major part of the cost and can total a quarter of the total construction price. Overall, you’re looking at around $87,000 for foundation and framing.
- Exterior completion: You’ll have to complete the exterior with a roof, siding, windows and doors once the frame of your house is in place. The average cost is about $42,000.
- Electrical, plumbing and HVAC: The infrastructure that heats your house and provides water and electricity is an essential part of your home. Most homeowners spend in the neighborhood of $40,000-$45,000 to have all of these components installed.
- Interior completion: From insulation and drywall to cabinets and flooring, finishing the interior of your home is one of the most expensive parts of the project. The nationwide average cost is $75,000 to complete work on the interior of a home, but this can go up significantly depending on your purchase decisions.
- Outdoor structures: Most homes have a driveway and many also include a deck or patio and some form of landscaping. These features might seem trivial, but they add up quickly. Homeowners spend an average of $20,000 in this category.
Is it cheaper to buy or build a house?
Building a new home tends to cost more than buying a preowned property, but how much more is dependent on many factors, such as the size of the new home, the scope of the project and what materials the homeowner chooses.
“On average, a new home comes with a premium in price,” says David Logan, senior economist at the NAHB.
It’s difficult to pinpoint a dollar value for that premium, however, because there are so many variables involved.
“One of the reasons that new homes come with a premium is that they’re often completely customizable, so the buyer can pick and choose every single exterior and interior finish,” Logan says.
Home building financing options
If you’ve determined that the price of construction is worth it, your next step is to explore your home building financing options. There are several options available to potential homeowners, and many offer competitive interest rates and attractive incentives.
1. Home construction loan
By far the most common form of financing the cost to build a house, home construction loans are designed exactly for this purpose. There are two main types:
- Construction-to-permanent loans
- Construction-only loans
Construction-to-permanent loans are a single loan that covers the cost of the land and construction, eventually functioning in the same way as a mortgage. Construction-only loans, also known as standalone construction loans, only finance the construction of your new home and require you to take out two separate loans, which can lead to higher fees and interest rates.
However, a construction-only loan might make more sense if you currently own a home and plan to sell it and use the proceeds to pay off the loan on your newly constructed home.
2. Personal loan
You probably won’t come close to financing the entire cost of building a house with a personal loan — the loan amount will be capped for most people at much less than the cost of a house — but you may use this method to pay for specific projects.
For example, if you’ve already secured a certain amount of financing for the construction of your home but need additional financing for landscaping, a personal loan could do the trick. Just keep an eye on your finances and make sure you’re not overcommitting when it comes time to repay multiple loans.
3. Home equity loan
If you already own a home and want to build another one, you may want to consider using a home equity loan on your first house to finance all or part of the second. The amount you can borrow will depend on how much equity you have in your current home. If you own it outright, you might easily be able to finance the majority of your new home.
Once construction is complete and you move into your new home, you can use the money from the sale of the first house to pay off the home equity loan.
4. Home equity line of credit
A home equity line of credit (HELOC) is another good option for financing the cost of building a house, provided you have a significant amount of equity. Like a home equity loan, you’ll borrow against the equity in your current house to procure financing to build a new one. The difference is that a HELOC acts more like a credit card than a lump-sum loan, and you’ll be able to borrow from the line of credit as needed up to the amount that you’re approved for.
You’ll also have more flexibility and can choose how much you actually borrow from a HELOC, and you can pay it back and borrow again as needed. This is highly advantageous when constructing a new home, since costs often fluctuate and additional unforeseen expenses can come up at any moment.
Tips to save on building a house
The best way to save on building a house is to get multiple quotes for every step of the process. Talk to multiple real estate agents, architects, builders and designers and ask each for a written estimate. If one quote is significantly cheaper than the rest, find out why before signing on the dotted line. You don’t want to blindly pick the least-expensive option; it could leave you with a poorly built house that requires frequent emergency repairs or costly add-ons that weren’t included in the initial quote.
You can also save money by doing some of the work yourself. For example, instead of hiring an interior designer, think about choosing the interior finishes yourself. Just be prepared for a significant time investment if you decide to take this route, as you’ll be responsible for choosing everything from flooring to paint to countertops.
Next steps: How to build a home
Logan says it’s important to think about your priorities. New homes tend to be bigger and more customized, but are also often farther from city centers and public transportation, because land is cheaper and easier to acquire on the outskirts of town.
Once you have a rough estimate of the cost to build your house, you can go to a financial institution and apply to be preapproved for a certain amount.
Once you’re approved, it’s time to start working with a real estate agent to find a lot, and also to contact an architect and builder to make plans. A good team of professionals will be able to work within your budget so that the cost of building a house won’t exceed what you can afford.