Can You Build a House without a Construction Loan?
Are you ready to build a house but want to pay cash?
It is possible! While most buyers apply for a construction loan to build a house, it’s not the only option when it comes to financing this new purchase. You can pay cash for a new custom home.
Now, “paying cash” doesn’t mean you go into your home builder’s office and hand them a few briefcases full of cash. What it usually means is the buyer pays out-of-pocket for the cost of their new home - either using a cashier’s check or bank transfer.
Below, we’ll explain when paying cash for a new house makes sense and what the benefits are if you can.
When Does Paying for a New House with Cash Make Sense?
Before you decide to pay cash for your new house, we’d recommend thinking through the following points to see if this option makes sense for you, or if it would be better to only use your cash for the down payment.
1. You Can Afford Your House Now and the New One
Are you staying in your existing home while you build? Do you have enough capital to afford your current house and pay cash for a new one?
You also might consider selling your existing home to rent while you build. If you’ve built up enough instant equity in your house, it might give you the funds you need to pay cash for the next one.
2. You Don’t Have Other Debt
If you have other debt to pay off that have higher interest rates, consider paying those down first before paying cash for a home - or apply for a loan for your new house and use the cash you have to pay off that other debt.
3. You Have Emergency Savings
Another thing to keep in mind as you evaluate your finances is whether or not you have a sufficient amount of money in savings in case of emergencies. Spending cash for a house with little to no extra capital can be risky.
What Are the Benefits of Paying Cash for a New Home?
If you’ve evaluated your finances and decided you do have enough cash to pay for a new home, and the extra stability to do so without putting yourself in a bind, then take a look at these benefits of paying cash for your new house to help you make the final decision.
1. A Great Investment for Your Money
New construction is especially lucrative because you can choose to build in new, developed neighborhoods close to good schools and amenities or build away from the city, which has become more desirable in the last several years. More and more families are looking to buy land in the country to get out of the city away from the traffic, restrictions, etc.
You can also choose the latest technology when building to increase its resale value.
2. Avoid Today’s High Interest Rates
One of the greatest benefits of paying cash for a new house is avoiding today’s high interest rates, which are around 7%.
Turner and Son Homes gives an excellent example of this to help this sink in - I’ve just adjusted the interest rate in their example since it has gone up significantly since they published their article:
“If you take out a 30-year mortgage on a $200,000 home and pay a 7% fixed interest rate, you will pay $279,017.80 over the course of your loan.”
That’s significantly more than the cost of the loan that you will pay out over time. If you have the cash, you could save yourself a lot of money over time by paying outright for your new home.
3. Lower Your Monthly Debt
By paying cash for a new home, you eliminate another monthly payment from your budget - a mortgage payment. That is an exciting prospect and will be one less thing you have to worry about each month, especially if you’re nearing retirement and want to trim down on monthly expenses.
4. Hasten the Home Building Process
Applying for a construction loan can take time. There is a lot of paperwork required and research done by the lender to ensure the money they’re giving you will be paid back. When you pay for your house in cash, none of this is needed - meaning you can skip ahead to start building your home.
You won’t have to wait on inspections, appraisals or underwriting with a lender.
5. Don’t Pay Any Closing Costs
Another way you’ll save by paying cash for your new house is by avoiding closing costs. These closing costs are usually associated with acquiring your loan to pay for the house.