We realize the decision to build your own home versus buy an existing home is about money and know-how. Most believe that custom homes are expensive and therefore don't seriously investigate what it would take to get into one.

However, not only can custom homes be more affordable than you think, they can be relatively easy to get into.

First Time Buyers

Figuring out how to finance your home is easily the most difficult part of getting into a home. One thing to remember is that there are as many ways to finance a home as there are brands and flavors of salad dressing on the shelf at the grocery store. For example, have you ever noticed Ranch, Bacon Ranch, Peppercorn Ranch, Buttermilk Ranch, Fat Free Ranch, Reduced Fat Ranch, powdered Ranch, etc.? There are equally as many financial packages.

We encourage you to meet with a loan consultant as early in the process as possible so he can help you identify a financial package that is best suited for your situation.

Down Payments & Mortgage Insurance

For most first time buyers, the most challenging hurdle is always the down payment. Many programs exist to assist first time buyers with overcoming this hurdle. Programs such as Fannie Mae and others offer financing with a 3% (or less) down payment. Some cities, such as Provo, have offered down payment assistance to help attract first time home buyers. These programs are all worthwhile and we hope you investigate them further.

One of the down sides to getting such a low down payment is that the mortgage company will require you to purchase mortgage insurance. Part of banks and lending institutions' risk management to compensate them against someone defaulting on a loan, mortgage insurance is usually required if you have less than 20% equity in your home. It will usually add an additional $100 to $150 to your monthly payments.

For example, if your home is worth $150,000 and you came up with 3% down ($4,500), you have 3% equity in your home. Because the bank loaned you $145,500, it owns 97% of your home-more than the 80% maximum to avoid mortgage insurance.

Most of our owner-builders will end up with at least 20% equity and will not need MPI insurance.

Building your home creates some interesting ways to avoid the down payment and mortgage insurance. The difference between the appraisal value of the home and the cost to build is considered equity in your home and can be applied as a down payment. The good news is that the difference is usually more than the required 20%, so you won't have to pay mortgage insurance.

For example, if you build for $110,000 and your lot is $40,000, the total cost to build is $150,000. If your home appraises for $200,000, you are considered to have $50,000 in equity or 25%. Because the bank only owns 75% of your home, it will not require you to pay mortgage insurance.

Closing Costs

Besides a down payment, one of the other major hurdles to getting into your home is closing costs. Closing costs are finance charges above and beyond the normal interest you would pay on a loan. While the interest you pay on a loan covers the cost of using the bank's money for the life of the loan, closing costs cover the costs of preparing the loan including a title search, etc.

Construction Loans

When you build your home, you actually begin with a temporary construction loan that is converted to long-term financing once you move in. Construction loans are riskier for banks because, unlike normal home loans that have a finished home as collateral, there may not be anything there if someone defaults on the loan. Consequently, not all banks will do construction loans and those that do usually charge a higher interest rate then the long term mortgage.

With a construction loan, the bank gives you a line of credit up to a certain amount (determined by the cost breakdown and price of your lot plus a fudge factor). During the course of construction, you will periodically make withdrawals to pay for building materials, subcontractors, and even the lot. However, unlike your long term financing, you do not make monthly payments on your construction loan; the interest for the construction loan is factored into the cost of building your home. There is a line item on the cost breakdown for construction loan interest.

Once your home is finished, you convert your construction loan into long term financing, frequently in the form of a 30-year fixed. This brings up notable issue you should remember when building--there are two sets of closing costs, one for your construction loan and one for your long term loan.

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