How Should You Finance Your Build?

Financing the construction of your new home is a big decision. Should you dip into your savings, take out a loan, or secure a mortgage? We’ve done it. We’ve seen thousands of customers explore it, and hundreds of customers actually do it. Let’s explore each option to help you decide what's best for your situation.

Use Personal Savings

If you have substantial savings, funding the construction yourself can be beneficial. You avoid interest payments and debt. For example, if your total construction cost is $250,000 and you have that amount saved, you can pay for everything outright. However, consider whether using all your savings leaves you without an emergency fund. It's wise to keep at least three to six months' worth of living expenses in reserve.

Explore Construction Loans

Construction loans are short-term loans specifically designed to finance building projects. They typically have higher interest rates than traditional mortgages. Funds are released in stages as construction progresses. For instance, the bank might release $50,000 after the foundation is laid, another $100,000 when the framing is complete, and so on.

To learn more about construction loans, visit Bankrate's guide on construction loans.

Consider using a Mortgage

Once your home is built, you can transition to a traditional mortgage, spreading payments over 15 to 30 years. This makes monthly payments more manageable. For example, a $300,000 mortgage at 6.5% interest over 30 years would have a monthly payment of about $1,896. Yes – that sounds like a dream number these days, but you get the idea. Use a simple calculator like this to model things out.

Some lenders offer construction-to-permanent loans, which automatically convert into a mortgage once construction is complete. This can simplify the financing process.

Leverage your existing Home Equity

If you own another property, a home equity loan or line of credit allows you to borrow against your existing home's equity. For example, if your current home is worth $400,000 and you owe $200,000, you might access up to $160,000 (up to 80% of your equity). This can provide significant funds but comes with the risk of losing your home if you can't repay.

Consult your financial advisor

You’ll notice a trend in our advice. We say this often. Talk to your financial advisor. Building a house is a huge and consequential decision. Before making it, speak with a financial advisor or mortgage broker. They can help you understand the pros and cons of each option based on your specific circumstances.

In sum

Financing your home construction is a significant step that affects your financial future. By understanding your options and seeking professional advice, you can choose a financing method that aligns with your goals and comfort level.