Many homebuyers dream of building their own home, ensuring that every detail is custom crafted with their needs in mind. But before signing a contract with a builder, it’s important to understand the full cost of building a house, including land, labor, permits, materials, and financing. Knowing what to expect helps you enter this exciting, but potentially expensive, endeavor realistically. Understanding home construction costs can help you avoid budget overruns, reduce financial stress, and choose the right loan options.
Getting Started on Building a Home
A good way to estimate the average cost to build a home is to break it down by the biggest factors, starting with property. Planning early allows you to compare construction costs per square foot, financing options, and regional pricing differences.
1. Lot, Land, and Site Preparation Costs
Before you can build, you’ll need to first evaluate where you will build. Unless you are constructing a house with a builder who has already secured the land, you will need to purchase a lot, as well as prepare it for a home. This may include tree removal, land leveling, etc.
Keep in mind these potential factors before pouring the foundation:
- Design loads and structural characteristics
- Economic design
- Previous structural history
- The groundwater table
- Topographical location
While the national average cost of land varies drastically between states, Angi estimates that you can expect to spend $800 to $5,500, or $2,300 on average, on surveying and land preparation before breaking ground on construction.
2. People, Plans, and Building Permits
You’ll need to begin planning your “musts” for the home, including the size and floorplan. This includes researching your “dream team” for your home, beginning with a general contractor or custom home builder. They should be able to estimate the following before you begin building and identify what areas could cause you to go over this budget:
- Building Materials: Lumber, concrete, windows
- Labor: Contactor fees, electric, HVAC, plumbing
- Project Management Fees
- Architectural and Engineering Services
These costs directly impact your total home construction budget and timeline. Once you’re ready to move forward with your team, house planning costs will depend on experience, complexity, permits, and inspections, but you can expect them to be anywhere between $700 and $1,500 for pre-drawn plans and between $2,000 and $20,000 for custom house plans.
Building permit requirements are another item that varies based on location, but the cost can be between $500 and $2,000. If you expect to add any sheds, patios, detached garages, and more, you might need additional permits from the town.
3. Foundation, Framing, and Structural Costs
After everything has been planned, it’s time to break ground! Beginning with a foundation, followed by framing and walls, roofing, and utilities, your costs will add up quickly. Follow these tips to keep your building costs lower:
- Use standard building materials rather than custom whenever possible
- Invest in energy efficient appliances, and HVAC systems to reduce long-term utility expenses
- Decide where to splurge and where to save
- Request multiple contractor bids to compare home building costs
Financial Options for your New Home
Building a home requires specialized home construction financing. Choosing the right loan can significantly impact your monthly payment and long-term affordability.
Construction Loans and Mortgage
Traditional construction loans are short-term (generally for a year), and the funds are aimed at financing the land, building/building materials, labor, and permits. While construction loans do allow funds to go toward purchasing land, they require the land, and you, to be ready to start building as soon as possible to accommodate the timelines. With these shorter timelines, you may also need to submit approved, detailed plans to your mortgage lender.
With a construction loan being short-term, the lender will typically only release funds based on stages according to your progress, and an appraiser will check on the progress throughout the construction period. You can expect to make interest-only payments* during construction until the home is complete. You can then transition and apply for a mortgage loan. Depending on the lender, your mortgage options are often either a Fixed-Rate or an Adjustable Rate Mortgage (ARM).
- A fixed-rate mortgage will keep your payments consistent monthly until the end of the loan period.
- Adjustable-rate mortgages (ARMs) have an interest rate that changes over time. ARMs typically offer lower initial interest rates, but the rate can increase or decrease, potentially changing your monthly payments considerably over the loan period. This could be ideal for people looking to move before the introduction period rate changes, but it can be less predictable for those with less flexible mortgage budgets.
First American Bank takes home lending to the next level by offering Fixed-Rate and Adjustable Rate Mortgages (ARM), as well as Jumbo, FHA, VA .
Using Home Equity to Build a House
If you already own a home and have equity in it, you may be able to borrow against it to help fund the construction of a new home. In some situations, a home equity loan on a different property can be used to cover certain construction-related expenses.
Is Building a Home Worth the Cost?
The national average cost to build a house in U.S. is $323,077, with the cost per square foot varying greatly between states. But with the rising cost of labor, as well as the ever-increasing values for top land locations, it’s important to understand what you are financially getting yourself into before you sign a contract. Creating a detailed home construction budget and working with experienced lenders can protect your investment and reduce financial risk.
At First American Bank, we are ready when you are and would love to talk to you about the variety of new home financing options we have. If you want to learn more about our construction loan and mortgage options, contact one of our trusted mortgage advisors.
