Building vs. buying a house: 5 things to consider

Homeownership is an exciting prospect, but it comes with some important decisions.

One common question is whether building or buying a home is cheaper. There are advantages and disadvantages associated with each path, and the cost can vary based on where you live and what type of home you build.

Let’s take a closer look at building vs. buying a house and what each option entails, including pros and cons, costs, and what to consider to make the right decision for your circumstances.

1. Is it cheaper to buy or build a house?
2. How to finance home construction
3. Financing options for buying a home
4. Pros and cons of buying a home
5. Pros and cons of building a home

1. Is it cheaper to buy or build a house?

Generally, buying a home is often more expensive than building one, though there are different variables to consider that can impact the cost.

The national median sales price of a single-family home was $442,100 in December 2022, according to U.S. Census Bureau and U.S. Department of Housing and Urban Development data. (The average sales price was $528,400.)

On the other hand, costs of building a house can vary greatly, with the national average in 2022 at $284,764, according to Home Advisor. But the company also notes that the typical range is from $110,765 to $495,152.

However, where you live can make a big difference. For example, the average cost of building a home in New York in 2022 was $600,000 compared to $214,040 in Iowa. 

2. How to finance home construction

If you’re planning to build a home, there are several types of construction loans you may want to consider.

Keep in mind that construction loans usually come with higher interest rates than mortgage loans. And instead of receiving a lump sum, it’s more common to get a series of smaller amounts throughout your home’s construction.

These are some popular types of construction loans that may work for your situation.

• Construction-to-permanent loan — This type of construction loan automatically converts to a traditional mortgage once the building of the home is complete, which saves you a step of having to apply to convert the loan. 
• Construction-only loan — On the other hand, with a construction-only loan, you’d likely need to apply to convert it to a mortgage loan if you can’t afford to pay it off in time. This leads to closing on a second loan and usually paying closing fees again.
• HELOC or cash-out refinance — If you already own a home and have built enough equity in it, you might consider taking out a home equity line of credit (HELOC) or a cash-out refinance to fund the new build.

3. Financing options for buying a home

If you’re looking to buy an existing home, there are different mortgage loans to consider. Here are some types of mortgages that may be available to you.

• Conventional loans — People with steady incomes and strong credit scores can usually qualify for a conventional loan from a private lender or bank. A conventional loan just means the mortgage isn’t part of a government program.
• FHA loans — FHA loans come from private lenders but are backed by the Federal Housing Administration, which usually makes them easier to qualify for if you have lower credit scores. The qualifications can be easier to meet, but FHA loans also require mortgage insurance, which can increase the cost of borrowing.
• VA loans — VA loans are backed by the U.S. Department of Veterans Affairs, which often makes them easier to qualify for if you’re a service member or veteran since the federal government guarantees a portion of the loan to the private lender, decreasing its risk. Lenders can still have credit requirements that applicants must meet.
• USDA loans — People looking to buy a home in a rural area can consider applying for USDA loans, which are backed by the U.S. Department of Agriculture. How these loans work can vary. Either the federal government backs a private loan or the government issues the loan directly. Usually you have to live in an area populated by less than 35,000 people to qualify for a USDA loan.
• Jumbo loans — Jumbo loans are issued by private lenders and refer to loans for large amounts that exceed Fannie Mae and Freddie Mac conforming loan limits.

It’s important to note that it’s helpful to shop around and compare a few potential mortgage loan. Make sure to consider the interest rate and other homebuying fees.

4. Pros and cons of buying a home

Let’s take a quick look at the advantages and disadvantages associated with buying a home.

Pros of buying

• Faster timeline — It’s typically much easier and faster to close on a sale of an existing home than it is to build a home from scratch.
• Established landscaping — While mature trees, lush lawns and blooming flowers might come with an existing home, when you build, you’ll likely have to tackle landscaping from the ground up.
• Existing community — Building a home can also involve building a community, whereas homes that already belong to a neighborhood can be easier to make connections in.

Cons of buying

• Less customization — You can opt to renovate but will face limitations when trying to modify an existing home (not to mention renovations can be expensive).
• More maintenance — Older homes especially can come with wear and tear, and you may need to handle expensive maintenance costs sooner rather than later.
• Bidding wars — When you make an offer on a home, you don’t know what other buyers are offering and can end up in an expensive bidding war to secure your dream home. 

5. Pros and cons of building a home

Now let’s look at how building a home stacks up.

Pros of building

• Dream home — You have the opportunity to build your home to meet your preferences.
• More space — Not only can you choose the square footage and design of your home, but you can choose a lot that is roomy and doesn’t have you sitting on top of neighbors.
• Ecofriendly and energy efficient — When you build a home from the bottom up, you can add the latest ecofriendly and energy-efficient features, like solar panels and high-quality windows that can help the environment and your utility bills.

Cons of building

• Need permits — Getting the right permits can add costs to your building project and can be time consuming to secure.
• Expensive to finance — Construction loans tend to have higher interest rates than mortgage loans.
• Stressful process — Designing and building a home from scratch is a lot of work and it can be quite stressful to oversee such a large project, even with contract help.

What’s next: Should I buy or build?

If you’re not sure if you should build or buy your next home, consider asking yourself these questions:

• What is your budget?
• Can you qualify for a construction loan if you decide to build?
• What’s your timeline for moving?
• Do you have “must haves” or specific dealbreakers for your future home?