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Home Build prep guide


Home Build Budget

Cost to Build New Home: A Home Building Financial Guide

Published on:


written by:

Carrie Barker


Are you dreaming of building a house but the financial unknowns, including the cost to build a new home, have you up at night questioning whether or not this is the best decision for your family?

Are you wondering if it would be easier (and cheaper) to just buy an existing home (although you can’t find exactly what you want)?

Do you feel overwhelmed and confused about how the construction loan process works or how builders charge fees or how to determine the cost to build in your area? 

Do you question if it’s even humanly possible to stick to your budget when building?

If you’re nodding ‘YES!’ right now because these questions (↑) are exactly what’s running through your head, then this blog post is definitely for YOU! 

Obviously, it’s important to understand how to estimate the cost to build a new home, but there are so many other financial details that come into play when building and we’re covering all of them here in this home building financial guide.

The Table of Contents below will show you exactly what you’ll learn in this lengthy (yet very informative) post, but first a quick spoiler alert … after reading this, you’ll have a much better idea of what to expect financially (when it comes to building) and you’ll feel more confident (and less overwhelmed) moving forward with building (and funding) your dream home.

I recommend that you read through the entire article, but you can certainly click on any topic in the Table of Contents and go directly to that section if you want to.

NOTE: Please contact a local builder, local attorney, and/or local lender for detailed information about construction loans, builder fees, cost estimates, etc. I am simply supplying the basic information you need to get started. This is not a substitute for actual legal or financial advice.


First, let’s talk about what the best option for YOU is when it comes to building a house vs buying.


Are you considering building a house because you just can’t find the perfect existing house to buy for your family? If so, are you unsure of pricing and wondering, ‘is it cheaper to buy or build a house?’   

This is a tricky question to answer in one blanket statement because there are SO many variables to consider.

However, I’ll give you my educated opinion on what I know to be cheaper (and why I came to this conclusion). I’ll also share tips on how to determine what is less expensive in YOUR location.


Generally speaking, it’s less expensive to buy an existing home than to build a new home. However, this is dependent on MANY factors. I don’t want to give you actual dollar figures (i.e. median home price in America) because real estate and building material pricing is highly dependent on where you live.

Also, pricing is dependent on what caliber of home you want to build. For example, a fully custom home build (i.e. unlimited floor plan and design options) costs significantly more than a production home build (i.e. builder offers a limited ‘menu’ of floor plans and design finishes to select from).

Related Reading: Custom vs Production Home Build: What Should You Choose?


It’s important to compare apples to apples when deciding whether building or buying is cheaper. The only way you can accurately compare buying vs. building is to look at existing homes for sale in YOUR city and speak with LOCAL builders.

I recommend that you find 2-3 existing homes for sale that are very close to what you want. Then speak to a local builder to determine the cost to build a similar house with the same square footage and the same caliber of finishes.


If you buy an existing house, you know EXACTLY what price you’ll be paying for the house. Sure there might be some negotiating on price, but once it’s determined, you know what the final price is. You can make sure it fits into your budget.

You do NOT have this price guarantee when you build a home. There are certainly ways to come up with a realistic home build budget; however, surprises do come up and the rising cost of building materials can affect your final price.  It’s also easy to get excited about design upgrades and this can really skyrocket your final home cost.

A custom home is trickier to predict the final price. If you build with a production builder who builds the same floor plan over and over while offering a limited choice of finishes, this builder can give you a pretty close estimate prior to building your home. It isn’t so cut and dry if you plan to build a custom floor plan with custom finishes and selections.

Another thing to consider … if you buy an existing home, chances are there is already landscaping and window coverings. These are both HUGE expenses! Plus, there are other new home expenses that might affect your budget such as fencing, alarm system, decking, etc.

When you build a new home, these expenses are coming out of YOUR pocket and should be accounted for when determining your home build budget.

Related Reading: 7 Unexpected Expenses When Building a Home


When you consider the rising costs of building materials and the extras mentioned above (window coverings, landscaping, etc.), I think you’ll almost always find that it’s less expensive to buy an existing home than to build a home.

If you’re on the fence about buying vs. building, do some local research (as mentioned above) and then make a decision that’s best for your family and budget. 

However, if you really have your heart set on building, then go for it! You can always build a smaller house or find other ways to reduce building costs.

This leads us into our next section … if you choose to build a home, you’re probably curious how much this project will cost you, so let’s talk about how to estimate the cost to build YOUR dream home.

Psst … if you want to dive deeper into planning for your build, click here to download my *FREE* Custom Home Build Prep Guide (+ checklist) and learn the 5 crucial steps to prepare for a home build with less stress, more confidence, and without blowing your budget!

Cost to Build a New Home: A Home Building Financial Guide


A blog reader once asked me, “is there a way to find out what the average building home cost per square foot would be?” 

I’ll share my answer about how to determine the cost to build a house below but, first, let me tell you that there are MANY variables that come into play when it comes to home build costs.

I can give you general estimates and other indicators, but there is only ONE way to get accurate (i.e. specific to your situation) information (which we’ll discuss below).


This question is virtually impossible to answer.

There are websites out there that offer averages for how much it costs to build a house. There are means and medians and all those stats we learned in school.

However, construction costs vary WIDELY between geographical locations … and even among builders within the same locale.

The single largest variable that affects the cost to build your home is your LOCATION.

Building a home in the mountains of California is VERY different than building a home where I live in the Midwest.

Obviously, the real estate costs are different, but also the engineering expertise levels and the special equipment needed to build a home on a mountainside are very different than building on a flat lot in Illinois.

Other significant variables that affect cost are:


If all you want to know is the ‘average cost’ to build a home in America, then just do a simple Google search. You’ll find a ton of (varying) information that is impossible to apply to YOUR personal situation.

On the other hand, if you want to know how much it costs to build a house in YOUR locale, my recommendation is that you start having conversations with local builders so that you get an idea of how much you can expect for your personal construction costs (excluding your lot).

I encourage you to talk to several builders (not just one) to see if the cost estimates are similar.

If you want to build a custom home, talk to builders who build custom homes.

If you want to build a production home, talk to builders who build production homes.

Compare pricing among the same types of builders (i.e. production vs custom builders).

If one builder is much lower in ‘price’ than the others, you might want to steer clear of him or her. This could be a red flag that this builder might be providing inaccurate information in order to secure your business.

Believe me, this will come back to bite you later in severe budget overages. It’s best to get a REALISTIC idea of the cost before you ever start building.

Like I said above, there are MANY variables that come into play when it comes to home build costs. 

However, there is only ONE way to accurately determine the cost to build a house in your location … talk to LOCAL builders! Also, be VERY specific in detailing your expectations for the caliber of home you want when asking a local builder to estimate the cost to build YOUR dream home!

Speaking of builders … let’s next discuss how they charge fees to homeowners.

Psst … If you want to dive deeper into planning for your build, click here to download my *FREE* Custom Home Build Prep Guide (+ checklist) and learn the 5 crucial steps to prepare for a home build with less stress, more confidence, and without blowing your budget!

How Home Builders Charge


Building a custom home is likely one of the most expensive projects you’ll ever experience. So it’s very important that you are familiar with how custom home builders charge BEFORE YOU BUILD!

More specifically, you need to know exactly how YOUR chosen builder charges before you sign a contract.

You should have an in-depth conversation with your builder so that you are VERY CLEAR on how they will charge you for your build … and do this BEFORE YOU START BUILDING! 

The key is for your builder to be completely transparent and honest with you. All of their fee information and bids should be clearly communicated in your construction contract.

Below I will cover the two ways custom builders typically charge clients: fixed-price and cost-plus.


With a ‘fixed-price’ contract, your builder plans out every detail of your home and gets bids ahead of time, and gives you a ‘final’ cost of your home (including the builder fees).

Of course, you are responsible for paying for any upgrades added while building (i.e. allowance overages) and any change orders, BUT your builder is financially responsible for covering mistakes (e.g. subcontractor mistakes or material mistakes).

Your build is also responsible for covering labor/material price increases during your build (although this has changed a bit recently with the material cost volatility during the pandemic, so BE SURE to get specific info from your builder on how material price increases will affect your bottom line)

This gives your builder an incentive to keep mistakes to a minimum and to complete your home in a timely manner because their profit margin decreases with mistakes and/or with any material/labor price increases during your build.

Some builders do add clauses into the contract (e.g. You have 60 days from the execution of the contract to start construction, or else the builder has the right to re-price the project), so be sure to read the ENTIRE contract (clauses and all).

Your builder should include a very detailed specification (specs) list in your construction contract so they can’t simply choose the lowest-priced materials to save money. Your builder will take this list of specs to all of the subcontractors to get a bid. It can take some time to collect all the bids before they can provide a final cost for your house.

Typically, you will pay your builder (via your construction loan) in a pre-determined draw schedule (i.e. a detailed payment plan in which you make payments to the contractor as work is completed). Again, this is something you want to be very clear on BEFORE you start building.

Also, discuss with your builder how they prefer to do the construction loan (i.e. does the builder carry the loan or do they expect the homeowner to carry the construction loan?).


  • You know in advance how much your house will cost
  • Your builder/contractor will look for the best deals on materials
  • Your builder/contractor will move the job along efficiently to save money
  • There aren’t any surprises because you are already quoted your final price (provided you don’t go over your allowances or do change orders to upgraded materials)
  • Your builder is responsible for paying for any mistakes and material/labor price increases (again, read all clauses in your contract … especially as the pandemic continues and greatly affects material and labor costs)


  • Your bid might not be as competitive as a cost-plus bid because your contractor needs to build in a small contingency fund for unforeseen events related to the build
  • Construction can be delayed because it takes a while to receive all the subcontractor bids

Related Reading: How to Prepare for a Productive First Meeting with a Builder


With a cost-plus contract, you pay the builder the actual cost of construction PLUS an agreed-upon fee to your builder (typically a percentage of the home cost; however, some builders take a fixed fee)

You, the homeowner, are responsible for financially covering mistakes and any material/labor price increases during your build. Not only do you pay more for these price increases and/or mistakes, but your builder fee also goes up IF it is based on a percentage of the final cost of the house.

Builders tend to use cost-plus pricing when house costs are harder to predict (e.g. large custom homes, very unique homes, and especially during the pandemic pricing volatility). Basically, your builder will give you a rough estimate of what they *think* it will cost to build your desired home. There is very little data (i.e. bids) collected from subcontractors.


  • This can be more competitively priced than a fixed-price home build because the builder takes on less risk


  • Even with a competitive estimate, your cost can skyrocket if expensive mistakes pop up or there is a rise in material and/or labor costs during your build
  • There is little incentive for your builder to competitively price materials because the cost is passed on to the homeowner PLUS the builder’s percentage fee goes up if material pricing goes up (because this affects the final cost of the house)
  • There is little incentive for your builder to complete your home build in a timely manner because he isn’t paying for the extra cost of loan fees and/or potential material and labor price increases
  • Uncertainty with the final price of the completed home

Now you have a basic understanding of the two typical ways that custom home builders charge clients: fixed-price and cost-plus. 

Both options have their pros and cons; however, a fixed-price contract appears to benefit the client more than a cost-plus contract.

The bottom line is that you should choose a builder you feel comfortable with and, more importantly, that your builder is completely transparent and clearly communicates all material/labor specs in crystal clear detail in your construction contract.

Ok, we’ve covered how to determine the cost to build YOUR home and how builders charge homeowners. However, we have another (very) important variable to discuss … how are you going to pay for all of this?! Let’s talk about construction loans now.

Psst … If you want to dive deeper into planning for your build, click here to download my *FREE* Custom Home Build Prep Guide (+ checklist) and learn the 5 crucial steps to prepare for a home build with less stress, more confidence, and without blowing your budget!


This isn’t the most exciting topic BUT a loan for new home construction is something you’ll need to know about when building a house … unless you have enough disposable income sitting around to pay for your new build!

For the rest of us… it’s important to understand how to finance your home build :). 

By the end of this section, you’ll have a basic understanding of the two main construction loan types (construction-to-permanent loan vs. stand-alone construction loan) as well as the pros and cons of each option.

Keep in mind that some builders choose to carry the construction loan. If this is the case for you, you won’t make any payments until you close on your new home with your permanent financing (i.e. mortgage)

Note: Please contact a local builder, local attorney, and/or local lender for detailed information about construction loans, builder fees, cost estimates, etc. I am simply supplying the basic information you need to get started. This is not a substitute for actual legal or financial advice.


Put simply, a construction loan is a loan to construct your home. It is essentially a line of credit that you tap into while constructing your home. 

Here are some notable points:

  • Construction loans are interest-only, AND you only pay on money that is actually disbursed
  • Your payments start out small and grow as more construction is completed and, consequently, more money is disbursed
  • Your lender disburses the money based on a pre-established draw schedule
  • Construction loans are more difficult to get than permanent financing because you are borrowing money for a building that doesn’t exist yet (i.e. the bank has minimal collateral)
  • When your home is completed, you pay off the construction loan with your permanent financing (i.e. your mortgage)

There are two main types of loans for new home construction: Construction-to-Permanent Loan and Stand-Alone Construction Loan.


Also referred to as One-Time-Close Construction Loan, the Construction-to-Permanent Loan is the more popular option. With this option, you basically have two loans rolled into one.

This is a GOOD thing because you have only ONE approval process, ONE closing, and ONE set of closing fees!

The money borrowed to pay for construction automatically converts to a permanent mortgage once the build is complete. At this point in time, you are able to choose how you want to permanently finance (i.e. fixed vs. variable rate, 15 vs. 30 years, etc).

During construction, the interest rate is variable and moves up and down based on the prime rate. However, you can lock into a fixed rate for the permanent portion. Some banks will even let you lock into a rate before construction begins (for a fee, of course).


  • ONE approval process
  • ONE closing
  • ONE set of closing fees


  • Less competitive permanent financing rates than the stand-alone construction loan
  • Less flexibility to go over in budget because locked into certain financing amount 


Also referred to as Two-Time-Close Construction Loan, the Stand-Alone Construction Loan requires a second (permanent) loan to pay off construction debt when your home is complete.

This type of loan is less appealing to consumers for several reasons. The biggest drawback is that you have to go through the approval process AGAIN when securing your permanent financing (i.e. mortgage) … which means a second closing as well as a second set of closing fees.

It’s also difficult to qualify for a stand-alone construction loan because your lender has minimal collateral, so the rules are pretty strict.

Not only is this risky business for a lender, but it’s also risky for you as the homeowner too. You aren’t able to lock in a permanent mortgage rate prior to construction so you are at the mercy of the prime rate which can move up during building.

You’re also at risk of your financial situation changing before construction is completed, and this could pose a problem in securing permanent financing.


  • More competitive mortgage rates because able to shop around
  • Greater flexibility to modify construction plans and increase loan during build


  • Must be approved twice and pay closing costs twice
  • Risk of increased interest rates before you secure permanent financing
  • Risk of your financial situation changing during construction


The most popular option is the Construction-to-Permanent Loan because you only go through ONE approval process and ONE closing … plus you can lock in your permanent rate.

The other option, Stand-Alone Construction Loan, does offer some benefits (flexibility in permanent financing), but the risks are higher, so you should strongly consider the pros and cons.

My hope is that you now better understand your loan options and feel more confident in making the best decision for YOUR family, budget, and needs.

Now let’s wrap up this home building financial guide by covering one of the most overwhelming (and scary) parts of building a new home … the budget (and, more specifically, sticking to it).

Psst … If you want to dive deeper into planning for your build, click here to download my *FREE* Custom Home Build Prep Guide (+ checklist) and learn the 5 crucial steps to prepare for a home build with less stress, more confidence, and without blowing your budget!


Has anyone ever told you, ‘It’s inevitable you’ll go over budget when building … everyone does’

Yeah, I’ve heard that too, but it’s not true.

The #truth is that *most* people DO go significantly over budget because they fall into the trap of 3 common mistakes when planning to build a house.

Just knowing these 3 mistakes (and avoiding them) can change the entire trajectory of YOUR home build. 

I’m here to tell you that you CAN build within (or very close to) budget.

I know this because I built my own dream home without blowing the budget. And you can too.

I’ll share the first mistake (to avoid) below, but I went ahead and created a *FREE* on-demand video training for you that covers all 3 MISTAKES that lead people to go over budget when building, as well as the 3 CRUCIAL STEPS to help you build your dream home within budget (regardless of the current home build market).

Be sure to register for this *FREE* training (you won’t want to miss it!), but here’s the first mistake that leads *most* people to go over budget when building …


This seems very simplistic, BUT this belief holds a lot of people back. If you assume that you’ll go over budget because everyone tells you *they* did, then it’s hard to believe there’s another way … a way that allows you to build within budget (or at least really close to budget).

This is the first mindset shift I want YOU to make. RIGHT. NOW.

The reality is that *most* people do go over budget when building BUT it isn’t inevitable. My house and my experience are proof of this. It IS possible to build your dream home without breaking the bank. It just takes some careful pre-planning before you ever break ground.

Instead of sleepless nights worrying about going over budget, how would it feel to have a solid strategy to help you build your home without breaking the bank? Pretty good, right?

I’ve created a *FREE* on-demand video training to help you get started in planning for your home build the RIGHT WAY! In this free video training, you’ll learn the other two mistakes (that you’ll want to avoid) as well as the 3 SIMPLE KEYS to help you build your dream home within budget (without sacrificing your must-haves … no matter how big or small your budget is).

  1. Irene says:

    We built our little home completely on budget. Mostly because we only had a set amount of money. It is possible. We worked like crazy people, that wasn’t quantifiable.
    And we’re getting ready to do it again building a retirement second home on an even smaller budget. It’s a good thing we learned so much the first time!

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I designed my own custom home from the ground up, inside and out. A home that is cozy, comfy, laid out perfectly for the way my family lives, and makes us happy every single day. Oh, and did I mention I did this all without blowing the budget?! 

Yep, it’s true. I’ve been there, done that, and actually lived through it … and you will too. Pinkie promise!

a.k.a. Caroline on Design

I’m Carrie Barker.

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