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Is It Cheaper to Build or Buy a Home?


After attending several open houses and still not finding the home you’ve been dreaming of, you might be wondering if it’s cheaper to build or buy a home. If you're only concerned with the upfront cost, building a house can be less expensive than buying one. However, there are a number of factors that will influence your total spending that should be considered when making this decision.

Costs of Building a Home vs. Buying One

Whether or not it’s cheaper to build or buy a house depends on where you're building and what kind of home you desire. Building a home is a costly process that entails securing a construction loan — which is different than a standard mortgage — and other individual costs that would already be included in the purchase of an already-built home.

Common costs of building a home include:

  • Buying a plot of land
  • Clearing the land
  • Construction costs
  • Paying for permits
  • Buying/installing home appliances
  • Electrical wiring and plumbing
  • Interior finishes
  • Exterior finishes

Though you can find a good lot of land for much cheaper than a home that’s already built, you should research costs and budget for the things mentioned above. Additionally, the cost of a lot (which normally includes all entitlements, access roads, and utilities) can cost two to four times as much as the cost of raw land.

Things to Consider Before Deciding to Build a Home

Do You Have the Financial Resources to Build a Home?

A simple rule of thumb for the financial resources necessary to build is to have approximately 20% of the post-value of the home in cash. This should cover change orders, workmanship that isn’t up to standard, and mistakes that occur in the layout of the home. If you don’t have 20% in cash, you can still build a home, but compensating factors (such as other assets and income) should be present.

How Does the Average Home in Your Area Compare?

The second criteria to determine whether to buy or build is if your military family will gain an advantage in terms of floor-plan layout, lot-to-home layout relative to those already available within the surroundings, or location.

To build a home is a major undertaking and many (there are approximately 139 million homes in America, according to the US Census Bureau, 2019) homes already exist. Existing homes may require some upkeep, but the fact is, there is a ready market of homes with comparables and pricing well known (less risk).

Additionally, building in rural areas increases the investment risks to the homeowner because demand for resale is lower there.

How Knowledgeable Are You About the Home-Building Process?

The third criterion to determine whether your military family should buy or build is knowledge: How much do you know about the costs, time, and process of building a home?

Here are some elements you’ll need to develop a working knowledge of:

  • Realtor contract
  • Insurance agreements
  • Title insurance
  • Subcontractor agreements
  • Required cash throughout the process
  • Potential for exogenous events (weather-related events, environmental events, etc.)
  • A firm understanding of the military family’s professional team (financial and background check)

Are You Prepared to Manage (and Push Back) Deadlines?

Something many may not prioritize when making this decision is their ability to handle stress and ambiguity during the process. Just like buying a home that’s already built, this investment is one of the largest purchases you will make. Unlike buying a home that’s already built, this investment has a lot more moving parts to oversee.

The amount of time you’ll need to dedicate to this is far greater than buying a home. This will be a long-term project requiring long-term costs. Additionally, more things to manage (and people involved) means there are more areas for things to go wrong. Are you prepared to deal with the major and minor headaches that come with building a home?

Final Thoughts

While this article does not intend to dissuade a military family from building a home, it hopes to educate and illustrate that building a new home requires knowledge, wisdom, curiosity, and financial acumen. Call AAFMAA Mortgage Services LLC (AMS) at 1-844-394-4526 or contact us online to better understand construction mortgages.

This article was originally published November 19, 2019.