Should you build your own home?

Building your own home takes patience, planning and dedication -- some experienced builders recommend weekly trips to the building site. It’s also more complicated to arrange the financing than it is to obtain a traditional mortgage. But the appeal is obvious -- hiring a builder to construct your dream home means it should fit your needs exactly.

So, are you cut out for it? To help you figure that out, here are the biggest decisions you’ll have to make before breaking ground:

Determine your budget. It’s very difficult to estimate how much a home will cost to build -- it may be anywhere from $50 to $150 or more per square foot depending on location, quality of materials and other factors. Books and software such as those available from publishers RS Means and Craftsman Book Company can help you determine how much you can afford.

Choosing a location. In addition to choosing the right neighborhood, you’ll have to carefully evaluate the site. Is it already served by public utilities? Does it have an acceptable water source, or will you have to dig a well? Will you have to remove trees? Are there zoning restrictions or other regulations that may conflict with your plans?

Custom vs. stock plans. If your dream house is an unusual design, or if you’re very particular about what you want, you may want to hire an architect or home designer, which may cost at least 10 percent of the total cost of the house. Ready-made floor plans are considerably cheaper and you can usually make minor changes.

Hiring a builder. Talk to friends, or contact the homebuilders’ association in your area to get a list of contractors. Interview several and be sure to check their references. Before deciding on a builder, make sure he or she supplies you with detailed specifications about all the materials for your home -- siding, plumbing fixtures, drawer pulls, moldings, hardwoods and everything else. You can purchase templates to make this easier. It’s a good idea to have a lawyer look over your building contracts.

You can go online to find a builder as well, and it can even save you money. The iNest website features information on over 8,000 new home communities and can be searched by builder, price, distance or location. The company offers consumers who purchase a home from one of the 500 featured builders using iNest’s cash-back coupons a one percent rebate on the base price of the home, which is available shortly after escrow closes.

Financing. Borrowing to pay for the construction of a new home is not the same as applying for a mortgage. Because the home hasn’t yet been built, lenders are incurring a higher risk, so financing may not be as easy to obtain. Give yourself time to shop around, and be aware that you will almost certainly have to secure financing before meeting with prospective builders. You have two main options:

  • A construction loan has a relatively short term -- under 12 months -- and is set up to pay the builder in several “draws,” or installments. Construction loans typically require you to pay only the monthly interest during the period when the house is actually being built. At the end of the term, when your house is finished, you need to arrange longer-term financing, such as a mortgage, to pay off the construction loan.
  • A construction-to-permanent loan covers the cost of building a home, then converts to a mortgage after you move in. The main appeal of this combination loan is that you apply for financing just once, so you save on hassle and fees. However, you may pay a higher rate on the mortgage than you would have if you had shopped around for each component separately. In addition, the amount of the mortgage may be capped at the total cost of the land and the construction, giving you no room to borrow a bit extra for landscaping or other improvements.

One final option: Some builders will finance the construction of the home themselves and add a premium to the price of the house. Because the builder is paying the interest, this may be an incentive for him to get the job done on time. However, you may wind up paying a higher rate than you would have been able to negotiate on your own.

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