Is It Cheaper To Buy or Build a House? Which Costs Less (and Other Need-to-Knows)

Traditionally, a lot of home buyers have seen building a brand new home as the ultimate homeowner experience to aspire to. That’s still true, but nowadays, older homes are gaining a lot more interest (just ask the producers over at HGTV).

And despite the renewed interest in historic homes and remodels, building a house from the ground up remains a popular aspiration. 

If you’re trying to decide whether to build or to buy, knowing just what you’re getting into with either approach will help you make your decision. 

Whether you’re chasing perfection in a forever home or looking for a simple starter home, each option has its pros and cons. First things first, you’ll have to get your priorities in order: 

• Cost: Is building a home or buying a home a better fit for your financial goals?
• Convenience: Buying an existing house tends to be more convenient, but will it still feel convenient when big-ticket repairs start piling up?
• Customization: You can customize a new house during the build, personalizing it to your lifestyle and taste. What would it take to customize an existing house?

Let’s talk about cost first. 

Cost: Building vs. Buying a House

In theory, a new house should cost more than an existing house. A new house built with modern techniques, and in pristine condition, could be more valuable than an older home that’s already been lived in – maybe even several times over. 

But with houses, it’s not always so cut-and-dried. Anything from local market trends to personal taste can impact whether it’s cheaper to build or buy a house. 

Before you get the 🔑: What are the differences in upfront costs?

In 2020, the difference between the average price of an existing home and a new construction home appeared to be substantial.

💲Lived-in 🏠 Average price of an existing single-family home[1]	💲New Construction 🏠 Average price of a new single-family home[2]
$300,200	$ 397,300

A new construction home in 2020 would have cost you just over $97,000 more than it would if you had bought an already existing house. 

But those national averages can be misleading because:

• Real estate trends and the cost of building materials typically vary between areas.
• Many new-home buyers want larger homes, which adds to the higher national average cost of new construction homes. 

In different areas across the country, the price per square foot of a new house is often closer to (or even lower than) that of an existing house. 

The easiest way to get accurate cost estimates in your area is to have a local real estate agent figure out the average difference in price per square foot between new construction and existing homes.

What can make building more expensive than buying?

Some of the biggest money drains include:

• Rising prices of building materials (which has been a big issue lately)^[3]
• Going big (on square footage) 
• The complexity of the house design
• Choosing more upscale features and materials
• Unexpected delays (from clearing a land lot to building the house) 

After you get the 🔑: What are the differences in homeowner costs?

When home buyers are trying to decide between building and buying, it’s important to look beyond upfront costs and consider the long-term costs of owning a brand-new home or an already existing home. 

Long-term homeownership costs, also known as the “operating costs” of your home, include things like property taxes, homeowners insurance, maintenance and energy costs. 

These contributing factors can make an existing house more expensive to own:

• Maintenance costs could be more frequent and more expensive.
• Energy inefficiencies could go through the roof (no pun intended). 
• Homeowners insurance is often more expensive for older homes.

The average operating costs for a new house are significantly less expensive^[4] than a similarly priced existing house. 

So, although the mortgage for both types of homes might be the same, it’d likely be cheaper to live in the new construction house. 

In general, the older the house is, the more the average annual operating costs go up^[4]:

📅 Decade Built 🛠️	💰 Average Annual Operating Cost 💸
Before 1960	$17,706
1960s	$15,287
1970s	$16,164
1980s	$14,647
1990s	$14,451
2000s	$14,688
2010s	$12,255

The average annual operating costs should be factored into how much you could be spending to live in an existing house. 

Breaking down the build: What goes into the cost of a new house?

Here’s a general breakdown of the factors that go into the cost of building a house. Being familiar with these costs might even help you cut a few costs. 

Cost Factor	Cost Considerations
Land (lot or plot)	Try to keep the price of the finished lot you build on to no more than 20% of your total budget for your new home (including any improvements necessary to make the land build-ready)
House Design	An architect’s fee is usually charged as a percentage of the construction project’s total cost. For new homes, it’s usually between 5% – 15%. You can save some money if you use a home builder’s house plan template.
House Construction	The construction costs of your house should be around 60% of your budget. This includes materials for everything from the foundation and frame to the interior finishes and fixtures and the cost of labor.

Where the financing comes from: What are the differences in loan costs?

If you’re financing your home or land purchase, not only is the loan process for buying different from the loan process for building, but the cost of the loans are usually different, too.

• Buying: Loans to buy a house are mortgage (or home) loans.
• Building: Loans to build a house are construction loans.

Construction loans typically have stricter credit score requirements (680 or higher) and involve more collaboration with the lender. 

Here are the main differences in cost between the two types of loans:

	Mortgage (Home) Loan	Construction Loan
Minimum Down Payment Requirement	It’s possible to put as little as 3% down with a conventional loan, 3.5% down with a Federal Housing Administration (FHA) loan or even 0% down with a Department of Veterans Affairs (VA) loan. Note: Lenders usually require borrowers to pay mortgage insurance if they put less than 20% down.	Between 20% – 25% down is required by most lenders. Low down payment FHA and VA construction loans are also available, but they can be hard to find.
Interest Rate Charged	Typically around 1% lower than the interest rates on construction loans After you move into your house, you’ll start paying off the interest as a part of your monthly mortgage payments.	Typically around 1% higher than the interest rates on mortgage (home) loans Once construction begins, you’ll start making interest-only payments to your lender.  Depending on the type of construction loan it is, once construction ends, you can either refinance the loan into a traditional mortgage loan or take out a mortgage loan to pay off the construction loan.

Convenience: Building vs. Buying a House

Let’s dig into a few of the convenience factors associated with building and buying.

Timeline differences between buying and building a house

Building a house usually takes more time than buying an existing home. 

Buying typically takes around 1 – 3 months, and that includes applying for and closing on a loan. On average, building a home takes around 8 months.^[5]

But in a hot housing market, delays fueled by scarcity and bidding wars can make your house hunt take much longer than you may have anticipated.

When you break down the steps it takes to build or buy a house, you can see why building usually costs you more in time and energy:

Phase	Steps to Build a House	Steps to Buy a House
Search	1. Look for a piece of land  2. Find a licensed home builder	1. Search for a house
Find a Loan	3. Apply for a land or construction loan	2. Apply for a home loan
Get Inspections and Appraisals	4. Order a land survey 5. Order a land inspection and tests to assess the land’s buildability	3. Order a home inspection
Close on the Loan	6. Undergo the lender’s loan underwriting process 7. Close on the loan	4. Get the home appraised 5. Undergo the lender’s loan underwriting process 6. Close on the loan
Everything Else	8. Order the design and floor plans 9. Get building permits 10. Choose every fixture and feature of the house 11. Prep the land for construction 12. Build the foundation 13. Build the house 14. Add a driveway and any outbuildings (like a garage or shed) 15. Put in landscaping
Celebrate	16. Move In! 🏡 🚚

The predictability and risks of buying vs. building a house 

When you move into an existing house, you may be surprised by some unexpected problems. The hardwood floors that once wooed you with their rustic charm could become your mortal enemy because you just realized that they squeak.

And then there’s the flip side of the coin.  

You’ve ordered the PERFECT marble tile for your bathroom only to have to accept the fact that it might not show up for weeks (or months!) because of labor shortages or supply-chain disruptions.

When it comes to new construction homes, some of the biggest delays on the road to homeownership can be caused by the land you want to build on. 

Issues with the land could delay construction (and additional costs) if they aren’t discovered and remedied early. 

Here are some things to consider before buying land or starting construction:

• Can construction vehicles access the land easily? 
• Will you have to pay for more specialized (think: more expensive) engineering because the land is too sloped to lay a foundation? 
• Are there any spots on your land that may be prone to erosion?
• Do any areas on the land flood during storms or rainy seasons? And are those flood-prone areas right where you want to build? 

Whether you’re buying a new construction home or an existing home, you’ll need a real estate agent who can advise you and help you steer clear of buying land that’s not suited to new construction or maybe even divert you from the “money pit” house with the squeaky floorboards.

You’ll need to order a home inspection of an existing home and a land inspection for a new construction home. Land inspections include important tests, like soil tests, to see how buildable the land is. 

It’s highly advisable to have an expert review and explain any test results. In the case of soil tests, for example, different results could imply different things about what might be required to build a stable house foundation.

Customization: Building vs. Buying a House

When you build, you can move into a home that is customized to your needs and vision. But the more you customize, the more your building costs go up. 

When you buy a house, you might be able to find one that is a strong match for what you’re looking for, but for many buyers, it can be hard to find the house that ticks all the dream house boxes – especially in a competitive market. Remodeling is an option, but it can be an expensive one.

Let’s take a closer look at what’s involved in customizing a new house and an existing one.

The custom factor: Building a house that’s ‘you’

In addition to potentially having more control over the plot of land your house will sit on, you can choose the exact interior and exterior details you want for your home. This could include:

• Floorplans
• Wall colors
• Flooring materials
• Lighting fixtures
• Sinks and tubs
• Countertops
• Cabinet styles
• Hardware (like faucets, handles, doorknobs, etc.)

It may sound pricey, but you’ll have a budget to work with, and you’ll be able to adjust your taste with your budgeting priorities. 

Sticking with the builder’s cost-conscious options for interior finishes and fixtures can also keep new construction costs down. 

The custom factor: Remodeling an existing house

Depending on where you’re looking, it might be hard to find an existing house that not only hits the mark with location, style and condition but also has the lifestyle features you want. 

Maybe you’ve got a big family and you’re having trouble finding a house with two bathrooms. Or maybe you or a family member needs the house to be wheelchair accessible. 

Remodel projects are expensive and they can become crazy expensive if what’s behind walls or under the floors produces a variety of extra, unexpected challenges. 

So, Should You Buy or Build a House?

Depending on your goals and financial situation, costs may be one of several factors you take into account while deciding between buying or building a house.

A knowledgeable real estate agent can help you better understand the area-specific price trends for either option in your housing market.

It’s also important to also take into consideration the total cost of ownership between buying or building a house, which includes differences in the cost of maintaining the home.

Ultimately, the route you take should be the one that brings you the most peace of mind. Regardless, homeownership can be a useful tool for building wealth – if done strategically.