Build or Buy a House: Which Is Cheaper?

Mortgage

If you’re in the market for an affordable house to own, you might be debating whether it’s cheaper to build your own home or buy one.

home under construction

For those who have attempted a large-scale renovation on an older home, it may feel as if it would have been more cost-effective to start from scratch with new construction. But many costs go into building your own home that you must factor into the decision of whether to build or buy.

Let’s look at some of the aspects of building vs. buying a home that may vary depending on where you live, the type of house you want, how you plan to pay for the home, and even if you are willing to consider off-grid living to reduce costs.

Home and Land Values in Your Area

What’s the price of land in the area where you want to live? How much would it cost to purchase a fully constructed house (called “existing construction”) with the features you need and the size you want? Are empty lots available to build where you want to live?

If you live in or are moving to a major metropolitan area or a suburb of a large U.S. city, it may be harder to find land and, if you do, the land will cost more.

On the other hand, if you move to a less populated area, you may be able to find several acres – or more – for under $20,000 or less.

When It’s Cheaper to Buy

Finding affordable land represents the first step toward being able to build a home for less than it would cost to buy. But if land goes for a premium in the area you wish to buy, it may be cheaper to buy a home.

Larger homes, obviously, cost more to build than smaller homes. If your main goal is to secure a house of your own for the lowest possible price, you can save money building a home in a less congested area where land is cheap.

It’s unlikely you’ll find a house for sale anywhere that doesn’t need a lot of work for less than $100,000. But you may be able to pick up a plot of land and build a small starter home like an A-Frame or a pre-fab home, or even one that would qualify as a tiny house of under 400-square-feet.

Types of Houses You Can Build

The cost of your house construction project depends on the house you choose. Here are some affordable examples.

Tiny houses – Tiny houses, typically under 400 feet, simply cost less to build than any other style of conventional home. They require less land, fewer materials, and take less time to construct.

Tiny houses may start as $10,000 and go up to $120,000 or more, which is the price of some regular homes. The average price for a tiny house is around $30,000 to $40,000.

Consider jumping on the tiny home trend to build your starter or retirement home.

A-Frame houses – A-frame houses represent a very simple style of construction with slanted roofs and a loft bedroom rather than a full-fledged second story.

Prefab Homes – You can buy the parts to a pre-fab home and have it put together, or assemble it yourself, on your property. Some pre-fab homes, called modular homes, come as individual rooms and pieces that connect. Each module includes plumbing, electrical, and everything else you need to build a house already installed.

Some pre-fab home kits come as individual panels and you’ll need to add the rest of the components. You can purchase pre-fab homes for as little as $50,000 or less on eBay.

Paying for Your Home: Construction Loan, Personal Loan, Land Loan, or a Mortgage

Unless you have cash reserves lying around that you want to use to buy your land or home, you’ll probably need to secure funding to pay for the property.

If you do have the cash saved, once you do the math you’ll probably realize it’s smarter to take out a mortgage or loan at a low interest rate and then invest your money at a higher rate of return.

That leaves you with several options to pay for your house or its construction.

Construction Loan

A construction loan acts as a line-of-credit rather than a conventional loan. The loan term usually lasts one year. In that time, you borrow the money you need as you need it. When you make your loan payments, you only pay interest on the money you borrowed.

In spite of only paying interest on the money you use, it’s important to note that interest rates on construction loans are higher than home mortgages. That’s because the land purchase is the only collateral available until the house is complete.

A construction loan can fund the land, building materials, and even provide funds to pay contractors to build your home. Your lender will want to see your construction documents and budget for the project and approve each step of the building process to be sure construction stays on track.

Once the home construction is complete, you can take out a conventional mortgage, which you can use to pay off the high-interest construction loan.

Personal Loan

If you’d rather not deal with the hassles of a construction loan, showing documentation to your lender, and taking out a mortgage after a year, consider a personal loan. The better your credit score, the lower your interest rate on an unsecured personal loan will be.

Personal loan terms tend to range from two to 10 years.

If you have cash reserves or assets that would cover the cost of the loan, you may want to take out a secured personal loan, using your cash or investments as collateral. You may be able to get approved for a secured personal loan at a much lower interest rate.

Land Loan

If you want to purchase land that doesn’t have power lines or public water running to the property, you may consider a land loan. Most lenders expect you to put at least 50% down on this type of purchase because it’s considered a high-risk investment.

Once you use the land loan to purchase the land, you may be able to finance construction through a personal loan. Or you can wait until you pay off the land loan, have utilities installed, and then get a construction loan.

Mortgage Loan

The best way to finance the purchase of an existing house is usually through a mortgage loan. These loans tend to have very low interest rates, especially compared to the loan options listed above. You may even be able secure an FHA loan with as little as 3.5% down if you’re a first-time homebuyer.

Connect Utilities or Live Off the Grid?

There are a few more choices to make when it comes to buying or building a house: What kind of utilities will you need?

Existing Construction

Existing construction, of course, comes already connected to sewer systems (or may include a cesspool septic system) and electricity. It already has home heating and cooling systems. And it’s probably fairly easy to run a cable television and broadband internet connection from the street to your house or, at the very least, connect to satellite TV and internet services.

At most, it will cost a small connection fee to turn on the electricity and internet service to your home. Sewer service probably costs less than $100 per year.

New Construction

On the other hand, new construction has none of these things. You’ll need an electrician to run all the wiring and then you’ll need to connect to “the grid,” which means you’ll be getting electricity from your utility provider.

Even if you decide to install solar panels, which cost an average of $13,142 (after tax credits), you’ll need to pay to have them connected to your electric company. Your electric company monitors usage and charges you if your solar panels don’t produce all the energy your household uses.

Septic systems can cost anywhere from $3,000 up to $10,000, according to HomeAdvisor. Heating and cooling systems vary widely, too, depending on the type of systems you prefer.

Building Your Home Off-the-Grid

If you think you can save money by living off the grid, you might be surprised. You’ll still need to invest in some sort of energy source, whether solar panels or wind turbines.

You can build a well for water and use composting toilets to avoid being connected to city water. But, unless you want to dramatically change your lifestyle, off-grid living may not be the best way to save money on your new house.

Some areas don’t permit off-grid living so it may be harder to finance your new house if you can’t show plans for utility hook-ups.

Bottom Line: Which Is Cheaper, Build or Buy Your Home?

Ultimately, you can save money building a home, especially if you choose a simple home style and are willing to do most of the work yourself. Plus, you’ll get the satisfaction of knowing the creative role you played in your home – and that everything in the house is brand-new.

But if you’re not considering a small house in a rural area where land is cheap, you may find it’s more cost-effective to buy an existing house and spend time and money over the years to turn it into your dream home.

Dawn Allcot
Meet the author

Dawn Allot is a full-time freelance writer and content marketing expert specializing in personal finance, real estate, and technology. In addition to her work at Crediful, Dawn regularly writes for LoopNet, Solvable, and The Balance.