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How To Pay For, Or Finance, a New Custom Home

Whether modern or traditional, a custom home can be designed to meet your family’s needs. You’ve just got to find a way to pay for it! Here is a look at a few of the options available for paying for — or financing — the construction of a new custom home.

September 19, 2019

Designing and building a new house can be one of the most exciting parts of anyone’s life who chooses to go down that path. You get to create a home that is specifically designed around you. A truly custom home, distinct from a new spec home, is a chance to have a home and yard that specifically meets your particular lifestyle, not to fit yourself into a home that is designed to appeal to most people.

Need a dining room for 20? Two master bathrooms to avoid a martial war? Bunk room for grandkids? A custom home is the way to go.

It also costs money, of course, and almost always costs more than a spec home. While the return on the investment is worthwhile for a lot of reasons, the money has to come from somewhere.

Here are the most common ways we see to pay for a custom home.

Cash

The easiest option, if you have it, is paying for it all with cash. Whether you secure the money through savings or private loans from family members or trusts, cash is the easiest in terms of handling the monthly payments.

A Construction Loan

This, in combination, with cash, is a very common option. You get your financial house in order and talk to a few banks (a good architect or builder can usually recommend several) and see how they work. They’ll typically want to see preliminary plans to start the conversation and then a final set of documents later on. (You’ll want to verify what “final” means to them, as every bank is different.) Then, they have the plans reviewed and appraised, and give you a loan based on the future value of the home, just like a mortgage. They then allow you to draw money based on a general contractor’s invoice. This usually, although not always, involves some painful paperwork and can be a logistical challenge, but it almost always works out if you’re willing to deal with some headaches along the way.

One note of caution is that most banks are used to spec homes and not custom homes. The appraiser is going to, with next to zero exceptions, appraise your house at a much lower value than it will be worth when you finish it. A well-designed custom house, as long as it isn’t “out there” (don’t do a 5,000 square foot, two-bedroom home, for instance), is going to stand out in the marketplace and be a great investment.

In my entire career, I have never seen a house appraise at the end of construction at the same amount the bank thought; it is always higher. This means you’ll usually have to have a big enough cushion of cash on hand to make up the difference.

A HELOC

A HELOC, or Home Equity Line Of Credit, is a loan on the equity in your house. Now, if you have a lot with a house you are tearing down, this isn’t an option, as the house will be gone. Sometimes, however, your new house incorporates part of the original house and a creative bank will let you start with a HELOC and then convert to a construction loan at some point.

I’ve also seen homes on larger lots where the HELOC is drawn from the existing house (which can be converted to a garage, backyard cottage, or accessory structure) to fund the construction of the new house. This is a rare scenario and requires a perfect storm of zoning and building codes, but I’ve seen it more times than I would expect.

Uncommon Options

Believe it or not, I’ve seen several clients use creative credit card strategies to help pay for a new house. Most builders and architects don’t take credit cards (that 3% fee adds up), but there are often numerous things that can be purchased on credit cards, such as appliances, which can help complete the financing picture. Be careful of high rates and go down this road very carefully.

In the end, there are numerous paths to pay for your dream home.

The path you pick will depend on a lot of factors. Gathering your team early enough ensures that you have time to get your ducks in a row and start down a successful path to creating a home you’ll treasure for years.

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