What Are You Going To Pay Out of Pocket When Building a Custom Construction Home?

By Ryan Siebert

When it comes to making the decision to building a custom construction home you will experience an excitement level that will feel like jumping out of a plane.  You will be so excited you may even think to go buy a shovel for each of your family members and start digging out your foundation while you wait for the permits to be issued.  This is my favorite part of the custom home construction process.  The question that often comes next is, “How much this dream house is going to cost me out of pocket?”

What amount of money can you plan for when you decide to build a custom construction home?  My clients often look at me when I am explaining the process like I am talking in another language.  It is frustrating because financially I know they are capable of completing the transaction, but the unknown out of pocket costs both upfront and during the build out are in a word, scary.  Who wouldn’t be scared when it comes to building a new home, let alone having to handle both the payments on your construction loan plus your payments to live in your current residence, and possibly the payments to store all of your furniture while you wait, extra gas on your car driving back and forth and even paying for those pesky “change orders”.  Today I am going to do my best to explain to you the out of pocket costs that you will incur when you make the decision to build your own custom construction home.  For the sake of consistency I am going to assume we are building a house for $500,000.00 in construction costs and we are purchasing the lot/land for $300,000.00.  

Up front costs

Your up front out of pocket costs for your custom construction home is a combination of your down payment, your closing costs with your lender, and often your architectural plans/blueprints.  

  • Down payment – For construction financing the general rule of thumb is a 20 percent down payment requirement.  Client’s often ask me if that is for the land or the construction costs and the answer is both.  Pull out your calculators and let’s work the numbers:
    • Lot cost = $300,000.00
    • Land cost = $500,000.00
    • Total cost = $800,000.00
    • Down payment at 20% = $800,000.00 X .2 = $160,000.00
    • On a side note, if you already own the land that you want to build on free and clear of all debts then you would have zero out of pocket down payment requirement!  In other words, you can use the equity from your current home/lot as part of your down payment.  

  • Closing costs when purchasing the land and with your lender
    • Your lender that will be performing your financing for you will have closing costs associated with the financing of your custom construction home.  Depending on the rate that you negotiate with your lender the costs can include up front origination fees to lower your loan.  These fees are typically based on the total amount of loan that you are borrowing, but negotiating a flat fee is recommended.  Loan fees will end up being around $2,000.00-$4,000.00 depending on the rate a terms you negotiate with your lender, this includes appraisal, inspection fees, and construction escrow fees.  You will also incur title fees, transfer taxes, and attorney fees, assuming you are purchasing the lot you plan to build on.  Title fees can run you another $2,000.00-$4,000.00.  Add to that an attorney fee of another $500.00 and a year long construction policy to insure your property and you are looking at a total of $5,000.00-$8,000.00 in costs in addition to your down payment.  
    • Back to our example = $160,000.00 in down payment costs plus another $5,000.00-$8,000.00 puts you at $168,000.00.  

  • Architectural Plans
    • What about the costs of the plans to build your property, don’t they have to be completed before you can decide your budget?  Yes, 100 percent yes!  The cost of your architectural plans can differ tremendously.  You could end up paying anywhere from $5,000.00 to $100,000.00 depending on the details of the home you are looking to customize.  Make sure to talk to your builder about the overall budget they are projecting so you understand what the cost will be for your plan set.  You will have to pay for your plan set out of pocket, and for a custom home I would plan for $12,000.00-$15,000.00. However, most lenders will allow you to show this as part of your down payment as it is an investment into the future building of your property.  

    • Back to our example, after your plan set you are potentially you are back to your down payment and your closing costs as your only up front out of pocket expenses, should you choose to roll your blueprint costs into the down payment.  If you do choose to pay for your blue prints up front, then you are looking at a total of $12,000.00 + $168,000.00 already paid for down payment and lending costs or $180,000.00.
  • Costs during construction
    • I am going to dive a little bit into the math of your construction loan in just a minute, but before I do I want to explain a few key points:
      • Construction loan payments are interest only
      • Interest Payments are based on the total amount borrowed/disbursed, not the total amount of the end loan.  In other words, if you paid $300,000.00 for the lot and you put $160,000.00 as a down payment the amount you are financing is only $140,000.00 until construction funds are disbursed.
        • Let’s further assume we have an interest rate of 4.25 percent, interest only for the first year.  This means that for the first two months while you are waiting for your permit to be issued your interest payments are only $140,000.00 times .0425 divided, then by 12 (months) = $495.83.
    • Typically your construction loan will have four draws during the life of construction.  Since this article is focusing on the costs to you while building a custom construction home, I am only going to focus on the percentages, and not the details of what the draws will cover.

*Note that once the 4th draw has been made the custom build construction home is now finalized.  Your loan payments will then turn into principal and interest payments depending on the type of financing that you chose with your lender.

Total payments during construction would be $11,900.00.  Adding the down payment, closing costs, and architectural plan set and you are now looking at $191,900.00 in out of pocket money to build your own custom construction home.  

  • Taxes –  One other thing, don’t forget the property taxes.  Just because you are doing construction on the home doesn’t mean that you can forget to pay taxes and insurance.  Your bank/mortgage lender will typically NOT make you hold an escrow account for your taxes during construction.  However, you need to plan of saving the money for the taxes on your own so you don’t forget about it.  The good news is that the taxes you are paying on typically are set up to be the taxes for the land itself.  The idea being that your home is not complete yet, so you do not need to worry about paying the higher tax value of the land.  That will come in the year after you live in the home.  A general math lesson for taxes is to take the total value of the taxes (or insurance), and divide by 12 (months in a year), and you end up with your monthly payment obligation.  
    • For our example we will assume a yearly tax fee of $6,000.00.  Your escrow payments per month would be $6,000.00 divided by 12 = $500.00 a month in savings you will need to account for in your own personal savings account.  

This was a longer article and it was full of numbers, which are not always easy to follow.  If you would like to sit down and talk about your specific project please feel free to call me at 847.602.7641 or email anytime Ryan@SGHomeBuilders.com