Thinking of Building a Brand-New Home? Do This First

by Christy Bieber | Updated July 19, 2021 - First published on May 19, 2021

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A smiling man and woman shaking hands with the contractors in their home that's under construction.

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A building fund could save you from financial troubles during the home-building process.

Building a home can be a really fun process since you get to customize every aspect of your space. But it can also be much more expensive than buying an existing house, and you are more likely to face surprises along the way.

You don't want to turn the build process into a disaster and end up regretting your new home before you even move in. To make sure that doesn't happen to you, it's a good idea to have some cash saved up for unexpected expenses. Keep reading to learn more about why it pays to be financially prepared before the build begins.

Why a building fund matters

Before construction starts on your new home, you should aim to save a building fund -- approximately 10% of the value of the home you're building. So if you plan to spend $300,000 on a new home, aim to save $30,000 in a reserve fund.

This may seem like a lot of money. It's certainly a big burden on top of having to come up with the down payment your mortgage lender will probably require. But, the reality is that when you are building, it's almost inevitable that you are going to face overages and surprise expenses.

This could happen if it turns out that the allowances the builder included in your contract don't include everything that you want. For example, you might have a $5,000 allowance for lighting for your home, but it may cost you $7,000 to get the lights you want for every room.

Surprise expenses could also crop up along the way if problems develop. When my husband and I built our home, installing a well turned out to be more expensive than we anticipated. The builder ended up having to dig twice as deep as planned, and we ended up having to pay almost $10,000 extra. This wasn't an optional expense, unfortunately, unless we wanted to have extremely low water pressure.

If you decide to make additions or changes to the original plan, you could also end up needing extra money. While it's easy to say that you won't do that, the reality is that all kinds of ideas can pop into your head once the building process is underway. And part of the fun of creating a custom home is that you get to make this your very own space. You don't want to miss out on the chance to add a feature you really want just because you don't have the money.

Finally, if your build process takes longer than expected -- which is very common -- you may need the extra money to cover extra rent or mortgage payments before you get to move into your new home.

If you don't have a hefty financial cushion saved, you could end up having to borrow money to cover housing costs or surprise expenses. Or you could be left with regrets that you had to leave things out of your home that you really wanted. When you've decided to incur the extra expense to build, you may as well do the process right -- which means making sure you have the extra cash if you need it.

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