Note: This post goes hand-in-hand with the How we Built $100,000 in Home Equity in Four Short Years post.   We have updated as time goes along, I hope you find it helpful!

Things to Consider When Building a Home

November, 2011:

My husband and I are in the process of building a new home.  Well, we aren’t, it’s being built.  There are many things to consider when choosing your options and upgrades.  If you know me, you know I am very stingy frugal with my money, so frivolous upgrades are out of the picture.  Do I want real hard wood floors and granite counter tops?  Absolutely.  Can I live without them?  Absolutely.   We can always go back and upgrade one thing at a time.  We are so used to working on our current home, we’ll probably miss it when we move!

Okay, that might be stretching it… 😀

There is no better time than now to purchase a new home.  Interest rates are the lowest they have ever been, and builders are still building new homes.  They are practically giving things away just to get you in the door.  The very first thing I recommend is choosing a builder that you get along with, you trust, and will work with you to tailor the house to your liking.  Building a new house is the largest purchase of your life, you want the experience to be fun, not dreadful.

When building your home you must consider many factors.  Oh, you know, like money for instance.  The builder gives you so much allowance per item.  We are able to pick anything up to a certain price per square foot of tile without being charged extra.  If you know anyone that works in wholesale or as a buyer for different types of building materials, definitely check with them to see if their cost would be cheaper.  My father-in-law owns a carpet cleaning business and can get high quality carpet at wholesale.  We are able to pick a much higher quality grade of carpet without an up-charge by working with them both.

When choosing appliances, the builder should also give you an allowance.  What my husband and I have been doing is checking the “damaged” aisle at Lowe’s Home Improvement.  Most of the “damage” is located in an inconspicuous spot that will most likely be hidden anyway.  I have 10% off Lowe’s coupons that we should be able to use on top of those deep discounts to save even more.   If you are military you’ll get 10% off as well! With patience, we will find higher end appliances for (hopefully) around 40-50% off.

Many people wish to have a finished basement moving in.  This is actually the opposite of what I recommend, and with good reason.  I’ll explain why, but we need some background information first…

Just Say NO to PMI

If you have less than a 20% down payment (which we all know can be a LOT of money to come up with at once), the lender will calculate the loan-to-value ratio of your home.  Until your home reaches a loan-to-value ratio of 80/20 (meaning you owe 80% of what your home is worth) you will pay Private Mortgage Insurance (PMI), typically assesed at a monthly rate equivalent to $55 per $100,000.  If you bought a $200,000 home, you could expect your PMI to be around $110 per month.  Yikes, right?  This PMI should drop off automatically at 78%, you can request it to be dropped when you reach 80%.

When submitting a request to remove your PMI, you will have to submit evidence that your loan-to-value ratio is in fact 80% or lower.  Most PMI providers require you to provide an up-to-date appraisal of your home, proving it’s current value.

Let’s say that you purchase your new home for $150,000 with an unfinished basement and you have a 10% down payment ($15,000).  Your loan-to-value ratio starts at 90/10 because you owe 90% of what your home is worth.  Don’t forget that you are also paying around $82 per month in mortgage insurance on top of your mortgage, and the loan-to-value ratio drops very slowly without making additional payments toward the principal of your loan.  BUT, if you make large upgrades that increase the value of your home significantly – like finishing the basement yourself – your loan-to-value ratio then drops significantly.  We are talking thousands of dollars here.  As a bonus, your home is now worth more!  You might pay more property tax, but your savings are still more than your tax increase.

Reappraise

Getting your home appraised again, an average cost of $300-$500, is definitely worth your money.  Let’s take that $150,000 home again.  You owe $135,000 on it the day you close on the new house.  You finish the basement within the first year.  All of the sudden your home is worth $170,000 or possibly more – depending on size, lay-out, if you also build a fence etc.  All of these upgrades combined lower your loan-to-value ratio to 80%.  BOOM!  Request your PMI to be removed from your mortgage and you’re immediately saving $82 per month.  That’s $984 per year!  Now that’s some significant savings!

It might take an extra year {or two} for the house to be completely finished, but in the long run, you save money on actually getting the basement finished by doing it yourself, and years (yes, years) of paying the $82 per month PMI payment.

I am no expert when it comes to building a home, this is our first go at it.  If you have tips that I need to know about, please leave a comment on this post.  I’m sure that collectively, we will ALL help each other!

*head over to THIS POST to read the 4-year later update.  It has now been 4 years and we’re still rocking it! ♥