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Building a home rather than buying one allows you to customize it to your needs, among other advantages. Material and labor shortages seem to have eased since the height of the pandemic, and the average price of a new-construction home in May 2023 was $487,300, down from $543,600 in November 2022, according to data from the U.S. Census Bureau. While that’s a healthy drop, it’s still more expensive than the median sale price of an existing home in the U.S.
But determining whether it’s more expensive to build a house from scratch or buy an existing one can be complicated. For new construction, a lot depends on the cost of base materials like lumber, labor costs and which finishes you choose, and inflation can impact your bottom line. Here’s what to consider for each option.
Key homebuying and building statistics
- Median sale price of an existing home in June 2023, per the National Association of Realtors: $410,200
- Average price of a new-construction home in May 2023, per the U.S. Census Bureau and Department of Housing and Urban Development (HUD): $487,300
- Labor costs for a new build: 40 percent of overall project, according to HomeAdvisor
- Materials cost for a new build: 50 percent of overall project, per HomeAdvisor
- Cost of a building permit: $1,200–$2,000, per HomeAdvisor
Costs of building a home
The costs of building a home include labor, supplies, permits, architectural drawings and inspections. You can cut down on expenses if you do some of the work yourself and select less expensive materials. Overall, the cost of building a home is largely contingent on how much you choose to spend on each component of the project.
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How to finance a new construction home
You can finance a new build, but not quite in the same way as if you were buying an existing property. Instead of a mortgage, you’d take out a home construction loan — a short-term, higher-interest loan that provides the upfront capital needed to build a residential property. Borrowers supply building plans, project timelines and financials upfront, and loan terms are typically one year. During this time, the property should be built and a certificate of occupancy issued.
Borrowers typically pay interest-only on the loan during construction. The principal remaining balance is then converted into a traditional mortgage once construction is complete.
Pros and cons of building a home
- Customization: Building means you get exactly what you want. Instead of wishing your home had a certain kind of flooring, a sunroom or some other special amenity, you’ll be able to tailor the property to your exact needs.
- No competition: When you build a home, you take the back-and-forth with other competing buyers out of the equation. You also won’t have to worry about the price being bid up by numerous offers.
- Move-in ready: When everything in your home is new, you shouldn’t have to worry about any major repairs (at least at the outset). Builder’s warranties should cover any problems that do arise in the first year.
- Wider market appeal: Your home is ultimately an asset, and when it comes time to sell, a newer structure could give you a competitive advantage.
- Longer timeline: While you’ll save time on attending open houses and scouring online listings, you’ll have to wait to move into your brand-new home. According to 2022 Census data, contractor-built single-family homes took just over 10 months from start to completion. If you’re paying rent during that time, that’s an extra cost to consider, too.
- More decisions: A blank canvas means you can customize your home, but it also means you’ll have a lot of decisions to make. If you’re busy with work and family, it can be challenging to focus on every piece of the construction process.
- Contractor challenges: Delays, miscommunication and issues with subcontractors — there are plenty of hiccups that can happen while building a home. Be sure to vet a few different builders to understand their work approach and timeline, and be prepared for speed bumps. Include time-of-essence, continuous-manning and right-to-remove clauses in your contracts with the pros you hire — these can help protect you in the event of delays or non-performance.
- Cost overruns: While you’ll have a budget in mind at the beginning of the project, there will almost always be expenses you didn’t anticipate, or materials you end up spending more for, that can add up to well above what you first set out to pay. Be aware of change orders, which could be a sign of an unscrupulous contractor. Make sure you understand the builder’s plans, finishes and specifications before signing an agreement.
Costs of buying a home
The costs of buying a home include:
- Down payment: Between 3 and 20 percent of purchase price
- Closing costs: Typically 2 to 5 percent of the mortgage loan, including lender fees
- Mortgage insurance: Between 0.58 and 1.86 percent of your original loan balance, if needed
- Homeowners insurance: Varies by state; national average is $1,428 per year for $250,000 in coverage
- Property taxes: Varies by location; median annual cost in the U.S. is $2,578
- HOA fees: Varies by location when applicable; average monthly cost is $170, according to U.S. Census American Housing Survey estimates
The down payment, the portion of the home’s purchase price that you pay upfront, is one of the most significant upfront costs of buying a home. In addition, when you close on the home, you’ll need to pay for a number of services, ranging from appraisal fees to attorney’s fees. These closing costs add up to 2 percent to 5 percent of the amount that you’re borrowing. Once you’re a homeowner, you’ll also be responsible for taxes and insurance, and you’ll need to be prepared for occasional repairs and upgrades.
How to finance a new home purchase
Shopping for a competitive mortgage is key to lowering the costs associated with buying a home. Negotiating fees with the lender, purchasing points to lower your interest rate and applying for down payment or closing-cost assistance can all be a part of your saving strategy.
Pros and cons of buying a home
- Move in faster: Buying an existing home means you can put a move-in date on the calendar much earlier compared to constructing one from scratch.
- Bargaining power: With existing real estate, you might be able to leverage the market to get a better price. For example, if a home you like has been on the market for more than 30 days, the seller could be willing to come down on price, or if a similar property in the area is priced lower, you can use that to justify a lower offer.
- More location options: If you’re set on living in a specific area, it might be easier to buy a home there than to try to find a lot to build on.
- Renovating over time: You can make individual upgrades to an existing home slowly, as your budget and schedule allow, rather than having to focus all of your resources on one all-encompassing project.
- Competition: That bargaining power mentioned in the pros? It might be zero, depending on where you’re looking. In a hot seller’s market, buying can feel like being at an auction as others drive up the price.
- Older appliances and systems: While it’s a new house for you, it’s technically been used. Depending on the age of the property, you might need to pay for repairs sooner than you expect. Your insurance rates will likely be higher than what you would pay to protect a new home, too.
- Compromises: The odds of finding your perfect dream home are low, so you’ll have to be willing to compromise, such as having one less bedroom or a smaller yard, when you find a home in your price range.
- No builder warranty: New-construction homes typically come with a builder’s warranty that offers some protection from major problems. With an existing home, especially an older home, you likely won’t know who completed the job and won’t receive any guarantees for parts, labor or workmanship.
Should you build or buy a house?
As you consider whether building or buying a home is right for you, it’s important to recognize that both processes include plenty of costs and potential stressors. The end result, though, should feel well worth it.
Think about the existing properties you’ve toured, your timeline for moving and your expectations for this new home. If building is your route, enjoy watching that dream home come to life. If buying seems like the better move, find a local real estate agent you trust and follow this guide on how to get the best mortgage rate.
Additional reporting by Meaghan Hunt