Buying your first home is an experience unlike any other. And although it’s thrilling, it can also include a bit of a learning curve. But rest assured, you’ll wind up in the home you’ve always wanted.
One of the biggest decisions that you need to make, fairly early in the process, is whether you want to purchase a new custom home or an existing home. Of course, a custom home offers a variety of benefits, most notably a floorplan and features that fit your unique needs. But there is a tendency for first-time home buyers to assume that building a custom home would be outside of their budget. Fortunately, that’s not the case, if you pick the right homebuilder.
Let’s take a closer look at your options for financing a new custom home versus an existing home:
Financing a Custom Home
Although paying for a new custom home may sound budget-busting, it’s probably a lot more achievable than you realize. That’s because financing a newly built home can actually be more affordable than financing an existing one.
As Ryan Holtcamp with Alliance Financial Services explains, you can obtain a construction loan with little or no money down. How is that possible? Because by building a custom home through Adair Homes, you actually gain equity through the building process.
Here’s how it works: Alliance Financial Services establishes your budget by adding the purchase price of the land—or the value of the land, if you own it—to the cost to build the home, the cost to develop the site, and your closing costs. Then, Holtcamp and his team do an appraisal on the complete project, from start to finish—not just the house itself. And that is where the equity is hidden.
“Within the site development stage, there is equity available to the homebuyer,” Holtcamp says. “You can tap into that equity as your down payment.”
By self-managing certain site development tasks, the homebuyer is able to save significant amounts of money, which creates immediate equity and does away with the need for a down payment.
And don’t worry: Getting involved in the site development process is easy—even for first-time homebuyers. Adair Homes even offers a special project management system that guides future homeowners through key site development tasks, such as painting the interior of the home or graveling a temporary driveway.
Financing an Existing Home
On the other hand, financing an existing home works a bit differently.
“Typically, to get the best rate and terms, you need to put down 20 percent,” Holtcamp explains. “There are other products out there that will allow lower down payments, but with those come mortgage insurance, which nobody likes to pay.”
Mortgage insurance is meant to protect lenders in the event a homebuyer defaults on a loan. If you purchase an existing home and are unable to provide a 20 percent down payment, you would be required to have private mortgage insurance, or PMI. Depending on the cost of the home, PMI can cost you hundreds or even thousands of dollars a year. And you have to keep paying it until you achieve 20 percent equity—a process that could take years.
But by opting for a new custom home, you can take advantage of built-in equity and avoid PMI altogether. As a result, you not only save money both now and in the years to come—you get to enjoy a brand-new home that has all the features you want and is in the perfect location for you and your family.
“There’s nowhere else you can build a fully custom home, wrap the land into the price, and potentially have no money down,” Holtcamp says. “Last year, we had upwards of 20 percent average equity in all of our projects—in some cases, over $100,000 in equity for some customers—and that’s without putting a dime down.”
Excited to learn more about building a new custom home? Visit our guide to building equity and start creating your custom home budget today.
