At some point, most people look at purchasing a permanent residence instead of continuing to rent a house or apartment. The number of choices can be intimidating, in particular in times like the present where there is an overage of available houses on the market, thanks to the slow real estate activity and the economy in general. During your search, you may think that it would simply be easier to start from scratch and have a home built for you. Here are some important tips in deciding which direction is right for you.
How Particular Are You?
The biggest positive in building a custom home is that you can decide any and every detail that is important to you. Do you want five bedrooms and no living room? Is having a four-car garage important? Do you want ten foot ceilings and hardwoods in every room? These are just a few examples of things that are not typical in most homes, but when you are building a custom home, you can make any of these choices you would like. However, you may not be that particular of many things, in which case designing an entire home for one detail is overkill. For example, you may want to have granite countertops in your kitchen, but the rest of the design is not important to you. That is a simple upgrade that can be done to an existing home. Weigh the costs of modifying an existing home with the effort and expense of building from scratch.
Another consideration is how particular you are with your location. If you have a developed part of town that you desire to live in, there is a chance that finding an available lot that is undeveloped isn’t as easy as areas further out from those developed areas. Many people find that undeveloped land is a fair distance from the center of town, which means longer travel times to work and other activities. This fact alone can discourage people from considering a custom home.
What Are Your Financing Options?
Buying an existing home generally requires 3-5% downpayment for most conventional loans. Unless you have enough cash to finance your project completely, you will need a construction loan to build a custom home. Most banks require 20% of the total cost of the home to come out of pocket from the building, along with stricter appraisal requirements, and many banks do not even offer construction loans. Generally, you will be responsible to pay interest only on the loan during the construction phase, and only on the amount taken as a draw to pay for completed work. At the end of construction, your loan will be converted into a permanent loan.
For most people, finding 3-5% for a down payment is intimidating, let alone 20%. Ask around to different banks to see what loans are offered. I have seen as little as 5% down payment required for construction loans, but it is rare.
How Long Will You Be In The Home?
Buying an existing house is a two to three month process, assuming you can find what you are looking for relatively easily and you do not have problems with your financing. Building a custom home easily takes a year and often takes longer from the beginning of the process to moving in. Additionally, there are many more decisions that need to be made when selecting a custom-built home. Finally, you can often buy an existing home for 5-10% less than building a new home.
That all being said, if you do not plan on being in a home for more than five years, I would not recommend putting the effort into building a custom home. If you are going to put in the effort and expense into building, you should be planning on staying in the home long enough to enjoy your efforts. It may be the the step you are at now is purchasing an existing home, with the next home that you move into being a custom home, when your plans are more stable.
Owning your own home is a wonderful step to take in life. Decide whether a custom home or an existing home is right for you. Both can be extremely rewarding and enjoyable.