Buy vs. Build: Pros and Cons
Philadelphia Mortgage Brokers
Philadelphia Mortgage Brokers Pennsylvania
Published on November 29, 2021
Buy vs. Build

Buy vs. Build: Pros and Cons

With low inventory of houses, you might be considering building rather than buying. It is a very attractive option in the current housing market. Let’s break down the pros can cons (and costs) of building vs. buying.

Buying an Existing Home: Pros

The biggest positive of buying an existing home is timing. The home is there, ready for you to move in. You don’t have to wait for it to be constructed. The second most alluring difference is price. It is generally more affordable to buy a preexisting home than it is to build one. The third big difference is the type of loan. A standard mortgage for an existing home typically has fewer restrictions, lower down payment requirements, and more favorable terms than loans for building a home. The reason for this is that exiting homes are less risky of an investment for a bank.

Loans for Building a Home

Unless you have the funds to cover the cost of building a home at your fingertips, you will likely need a land loan. This loan covers the cost of the land upon which the home will be built. In addition to the land, you will need a construction loan to cove the costs of building the home. Often, these two loans are combined into one loan for land and construction. These loan types tend to have a higher credit score minimum, higher interest rates, and higher down payment limits. Remember that no loan needs to last forever. Once the construction is complete, you can refinance the construction loan into a permanent mortgage or secure a new loan to pay off the construction loan.

A unique feature of a construction loan is that it is generally paid out in draws (regularly scheduled installments from the lender to fund phases of construction). The borrower only pays interest on the amount that has been paid out. That means that if they have a construction loan for $500,000 and only one $50,000 draw has been issued so far, they borrower only pays for interest on that $50,000 until another draw is paid.

Another option for current homeowners is putting the equity in their current home to use with a home equity line of credit. This leverages the current homes’ value for cash on hand to finance the construction of the new home.

Depending on where you are buying, you might be eligible for a USDA loan. The United States Department of Agriculture offers subsidized loans for some rural and agricultural properties.

Buying an Existing Home: Cons

The most obvious downside is choice. When buying an existing home, your options are limited to what is available on the market. Whether it is size, location, or amenities, some form of compromise is common when buying and existing home. You can always renovate to suit your need but renovation with add to the cost of your home and could potentially require you to live elsewhere while the work is completed.

Building a Home: Pros

A tailor-made home that is in your preferred location, with your ideal layout and design choices is the major pro for building a home. Additionally, your appliances will all be new. Generally, that means less surprise big ticket repairs and replacements in your first few years in the home.

Building a Home: Cons

As stated previously, price and timing are you biggest downsides to building a home. Additionally, there are more hoops to jump through. A variety of permits and inspections will be required and vary depending on your municipality.

How Long Will It Take?

According to the Census Bureau, it typically takes between seven and eight months to build a house in the United States. Factors such as availability of supplies and labor and weather conditions will affect the timing. Getting approved for a mortgage can be much quicker. Our current average time from application to closing is 30-45 days for purchases. However, house hunting can take months, especially when inventory is low.

Bottom Line

It is an extremely personal decision. When weighing your options, be sure to have a clear budget in mind. Then consider if you plan to stay in the home for a long time or if you might move in a few years. Be sure to be honest with yourself and anyone who will be purchasing the home with you when it comes to top priorities such as location and design. Will an 4th bedroom be a deal-breaker or could you make do with 3? Will that kitchen layout work for you will the limited space drive you crazy? Do you need to get out of your current living situation quickly or do you have the time to wait to build or renovate or simply house hunt for the diamond in the rough?

If you need guidance, we’re here for you. We can help explain the typical costs of building a home and the current price range. We can also help you crunch numbers to see what options might fight in your budget.

Philadelphia Mortgage Brokers
Philadelphia Mortgage Brokers Pennsylvania
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