To Build or To Buy? Home Construction Loans vs. Mortgages

Buying a house is the biggest investment many of us make in our lifetime. It’s only natural (and smart) that we’d want to be as careful with our money as we can.

One of the many decisions to make when you’re planning to buy a house is whether you should buy or build. Both choices offer homebuyers unique advantages, a few drawbacks and different financing options.

Which one is the right decision for you? Here’s what you should think about when choosing whether to buy an existing house or build a new one.

Pros and Cons of Buying a House

Choosing an already-built home can provide both benefits and drawbacks, depending on your budget and expectations for homeownership.

The pros of buying an already-built house are:

  • The process is usually quicker. You can avoid the inevitable delays of construction and get moved into your new place sooner.
  • You can see how the house, lot and neighborhood look. Being able to see the landscaping, how close you are to your neighbors, and how well-maintained the neighborhood is helpful in making a smart decision.
  • You know the cost of an existing home upfront – and get the final closing costs in advance. Building a new home, however, can end up costing you more than you expect. A variety of potential overruns, from change orders to the shifting costs of supplies, can bust your budget and strain your finances.

Potential cons of buying an already-built home are:

  • Dealing with the wear and tear previous owners may have put the house through can be expensive. Plus, the HVAC, roof, and other parts of the home may need to be repaired or replaced shortly after you move in.
  • You might not get exactly what you want. An existing home “is what it is” and may be missing some of the features and upgrades on your wish list. If the kitchen is too small, or it doesn’t have as many bathrooms as you want, it may be costly to change.
  • It might have hidden issues. Some homes suffer from previous water or pest damage that’s not obvious on the front end.

Pros and Cons of Building a House

Working with a contractor to build your own home might be the best option for your family. Building offers you some exciting benefits, but it also has its own complications.

The pros of building a new home are:

  • You can tailor the design, layout and features to your exact preferences for more customization options.
  • Since the materials and appliances are brand new, you’ll most likely have years of worry-free living before you need to repair or replace anything.
  • More energy-efficient options can be incorporated into your new home (appliances, lighting, windows, and more) to reduce your utility bills and your carbon footprint.
  • It’s yours and only yours. You can rest assured the home has no previous owners or history.

Just like buying an existing home, building a house comes with some disadvantages that may make you think twice:

  • Unforeseen construction challenges and increases in materials costs can drive up your final home price.
  • Bad weather, supply chain disruptions, and building scheduling issues can cause your timeline to drag out by weeks or months, delaying completion of your home.
  • Making every little decision can be stressful. While choosing every piece of your new place may sound intriguing, picking every knob, light switch, faucet and paint color can quickly become exhausting.

Financing Differences: Mortgage Loan Vs. Construction Loan

Opting for an existing home means you’ll probably need a mortgage loan. You’ll start by talking to a lender and giving them permission to approve you for a loan. They will pull your credit and review your financial picture to make their decision. From there, you’ll choose the loan program that best fits your needs (whether it’s a tradition, FHA, VA, THDA or other mortgage). You’ll pay interest on your loan that will be included in your monthly payment, along with your homeowner’s insurance and property taxes.

A construction loan is a short-term note given in drawn-out disbursements that relate to your contractor’s building milestones. These loans usually come at a higher interest rate and require stiffer criteria to get approved. Once the home is built, the borrower refinances into a traditional mortgage loan.

The answer to “Should I build or buy?” depends on your specific situation. By carefully considering the pros and cons of each, you can make the best decision for your finances and your future in the home of your dreams.