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Should I buy or build a house?

minute read

    This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer this type of loan. Any information described in this article may vary by lender.  

    Discover why more and more people are choosing to build their own homes.

    For a long time, George Petropoulos and his wife Janae wanted to move on from their starter home, but they couldn't find a house in their area that fit their needs and style.

    "We knew we wanted to stay within the community we loved, but everything seemed overpriced and not the upgraded look we wanted," says Petropoulos. Eventually, they decided that if they wanted the perfect house, they'd need to build it themselves.

    Eighteen months after breaking ground, they had their dream home: an open-concept ranch with seamless steel siding, an asphalt roof, and an exposed basement featuring a half-sized basketball court. "It was a journey—but we couldn't feel happier that we built, versus bought," Petropoulos says.

    The Petropouloses are part of a small but growing trend: homeowners who choose to build their own home, instead of buying an existing one. According to the US Census, roughly 50,000 Americans built their own private home in 2014, the most recent year with available data.

    If you're interested in building your own place, here are a few things to consider.

    Run the numbers

    In a direct comparison, buying is usually cheaper than building—at least in the beginning—but there are ways to spread out the costs and ease the strain. To begin with, consider buying your land ahead of time. In the Petropoulos' case, they bought their land 12 years before building, a move that helped pace out the expenses—and the loans that they needed to take out.

    You can also save by using prefab modular or track home buildings, which some lenders will help you finance. The National Association of Home Builders cites the cost per square foot for a typical modular home as $76.80, versus $94.34 for a home built on-site. Designs can range from two-story homes to ranches. These eco-friendly homes are built almost entirely in a factory setting and 50 percent less time to construct, which helps keep expenses down.

    Regardless of whether you're going for a modular or an on-site home, tax incentives can also help costs, especially if your home is environmentally friendly. Common tax breaks include savings for installing solar heating, insulation, air conditioning, lighting and water heaters. Speak with your lender about these options—and keep in mind that tax credits vary depending on your state and region.

    Scope out your construction loan

    Another way to save time and money is by preparing ahead of time for your construction loan. Petropoulos recommends carefully looking over your financial health and consulting with a loan officer before you move ahead with a loan. With this in mind, consider keeping new loans in-house with your current bank because they already have a working relationship with you. It might even be possible to seamlessly integrate the new loan into your existing financial services.

    This can be particularly helpful when it comes to constructions loans, offered by some lenders. Construction loans can be trickier than the standard home loan. For example, they usually have a one-year term, unlike long-term mortgages, which usually extend over 15-30 years. Consequently, home builders typically take out multiple short-term loans for each stage of the build. They also tend to have variable rates that are higher than permanent mortgage loans. Again, this is a place where your primary bank may be able to clarify the loan process.

    John Foust, who built a home in Ohio, found the construction loan system more complicated than a standard loan because lenders base the value on blueprint plans instead of an actual home. And, because the construction process required multiple closings, it made the process more challenging.

    "The requirement for multiple closings in a traditional construction loan can add extra stress and financial burden when expenses already feel stretched with the project," he says.

    Foust adds that a construction loan may not cover all construction overrun costs, which might mean that you'll need to take out other loans to cover your costs. Also, because construction can take a while, you may be paying your current home mortgage while applying for and paying off a construction loan, a combination that can complicate the approval process. This, too, is a place where talking to your banker can help.

    Prepare for unexpected expenses

    No matter how well you plan, hidden expenses may still creep up. When Foust and his husband built, they encountered a $20,000 discrepancy in a bill to excavate dirt for the build. But they found that, by using a reputable builder, they were able to head off a lot of problems. “When we noticed a missing hole for an oven vent, they came back the next day and fixed it," Foust recalls. While their builder wasn't the cheapest one they looked at, their higher price ultimately paid off. "We saved time in the long run," he says.

    Another pro tip: Take time to review the specifications and contract. "It takes time to absorb how the house will come together," Petropoulos says. In his case, he had to pay for an expensive last-minute change when he realized that the garage doors needed to become quieter because of the proximity to their kids' rooms. Swapping three doors cost $200 per door, plus a 10 percent fee. At every step of the way, remember that you're in charge, and take as much time as you need to make the best possible decisions.

    Creating a space just for you

    For Foust and his husband, the opportunity to create the perfect space for themselves factored heavily into their decision to build: “While we looked at nice neighborhood homes, they lacked the open space, the stone fire and open kitchen," Foust says. "We felt interested in creating something just for us."

    Now that their home is finished, Foust says the end result feels amazing. "We don't want to change anything inside because we got exactly what we wanted," he says.

    The Petropouloses agree, and point out that the whole family learned from the building experience. Their children joined builder meetings, saw the foundations getting laid, and marveled at seeing a house with no walls. Today, they know how plumbers install pipes and electricians wire rooms. They chose paint colors and convinced their parents to build an indoor basketball court—complete with high school metal lockers—to help the family weather Wisconsin's infamous winters. “Our build made them smarter children and has molded them," Janae says.

    Both families agree that nothing beats the pride of living in your finished product. Foust says that seeing their drawings come to life in bricks and mortar was fulfilling and satisfying. "We feel comfort from living in our own creation that fits well with the way we live—and how we intended the house to fit in the landscape," he says.

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