Why are new construction homes cheaper? Is it true?

When you’re in the market, looking for your dream home, you might wonder why are new construction homes cheaper than existing homes. Is it indeed true or just a fallacy? Let’s find out if newly constructed homes are actually more budget-friendly than older homes or not. 

Why are new construction homes cheaper? Is that the case?

At first glance, you might think that newly constructed homes are more expensive. After all, they’re brand new, often come with modern amenities, and can be customized to your liking. However, when you look closer, newly built homes can be cheaper than existing homes. Let’s explore some of the reasons.

Cost of construction vs. older homes

One of the reasons newly constructed homes might appear cheaper is the cost of materials and labor. Builders often buy materials in bulk, which can significantly reduce costs. 

Lower maintenance and repair costs

Newly built homes typically require less maintenance than older homes. Generally, these homes are built with the latest technology and materials, making them more energy efficient. This can save homeowners thousands of dollars over time in heating, cooling, and maintenance costs. 

An existing home might have an older roof, outdated plumbing, or a furnace that’s on its last legs. These potential repairs can add up to a substantial amount over the first few years of ownership. With a new construction home, everything is new, and builders often offer warranties on their homes, which can cover home repairs for a certain period.

Huge potential for customization 

When you buy a new construction home, you often have the option to customize it to suit your needs and preferences. This means you’re not spending extra money on home renovations or updates.

More energy efficiency

New homes are designed with energy efficiency in mind. From better insulation to energy-efficient appliances, newly constructed homes can reduce utility bills, making them a cheaper option over the long term.

Lower closing costs

These expenses can sometimes be lower with new construction because some builders may offer incentives to help with these fees. However, this isn’t always the case. Therefore, it’s worth discussing with your builder or real estate agent.

More manageable interest rates on new homes

With newly constructed homes, you might have the opportunity to lock in lower interest rates during the construction phase. This can be advantageous, especially if rates are expected to rise.

Lesser price per square foot

Often, new construction homes are cheaper when considering the home price per square foot compared to older homes. This is because you’re getting a home with no wear and tear and the latest features and finishes.

What is the cheapest house to build?

If you’re thinking about building a new home, the cheapest option is usually a smaller, simple home. A smaller footprint means fewer materials, less labor, and lower costs overall. Popular options for cost-effective builds include ranch-style homes, which are single-story and easy to construct. Or, tiny homes that are highly affordable due to their size.

When it comes to a budget to build homes, there are factors to consider. These include the cost of land, the type of home you want to build, the current mortgage rates, and the housing demand in the area. For example, in places such as Salt Lake City, the demand for homes has been high, and so has the median sale price for both newly built and existing homes. 

Read more: Tiny homes cost

What are the advantages of buying a new construction home?

• One of the biggest perks of buying a new construction home is the ability to customize it to your liking. You can often choose the layout, finishes, fixtures, and even some design elements.
• New construction homes are often more energy-efficient than older homes. For instance, features such as double-pane windows, better insulation, and energy-efficient home appliances can contribute to a more sustainable lifestyle.
• Because everything in a new construction home is brand new, you won’t have to worry about replacing the roof, fixing old plumbing, or dealing with outdated electrical systems for a long time.
• New homes often come with warranties that cover certain aspects of the home, such as appliances, systems, and structural components. This provides peace of mind knowing that if something goes wrong in the first few years, it may be covered by the builder.
• New homes come with the latest design trends and technologies, such as open floor plans, smart home systems, and high-quality building materials. This can make the home more comfortable, convenient, and up-to-date.
• Builders may offer financial incentives, such as covering some of the closing costs, offering upgrades at no additional cost, or buying down your mortgage interest rate. These incentives can make the overall cost of buying a new home more manageable.

What are the disadvantages of buying a new construction home?

• New construction homes may come with a higher price tag than older homes in the same area. Especially, if you choose upgrades or premium finishes.
• New construction houses are often built in developing areas, which may be farther from city centers or established neighborhoods. 
• Unlike buying from a private seller, builders often have set prices for new homes, leaving little room for negotiation. This means you might not be able to haggle as much on the price as you could with an existing home.
• If you’re buying a home that hasn’t been built yet, there’s a risk of construction delays due to weather, supply chain issues, or other unforeseen circumstances. 
• New construction homes can sometimes lack the unique character and charm of older homes. Mature neighborhoods often have established trees, landscaping, and a sense of community that might take years to develop in a new area.
• If you move into a new construction development, you may have to deal with ongoing construction noise, dust, and traffic as other homes are built around you. This can be inconvenient and impact your quality of life for some time.
• While many new homes are built to high standards, there can be cases where speed and cost-cutting measures lead to lower-quality craftsmanship or materials. It’s essential to do your due diligence, such as hiring an independent inspector, even when buying new.

How to finance a new construction home?

Financing a new construction home involves a few more steps than buying an existing home. But, with the right preparation, you can navigate the process smoothly. Whichever loan you go for, make sure to understand the terms and conditions. And, always work with experienced professionals to help guide you through the loan process.

Here are some of the common financing options for new construction homes. 

Traditional mortgage for developer-built homes

If you’re buying a new construction home directly from a real estate developer or home builder, you typically finance it with a standard mortgage. Here’s how it works:

• Shop around and select a mortgage lender that offers the best rates and terms for you. 
• It’s important to look into a longer rate-lock period. A rate lock ensures that your mortgage rate won’t change for a specified period. This can protect you from potential increases in interest rates while your home is being built.

Construction loan for custom builds

If you own land or plan to purchase land and build a custom home, you’ll need a different kind of financing called a construction loan. This loan covers the costs of building the home and is more complex than a traditional mortgage. 

A construction loan provides the funds needed to pay for the construction in stages. You’ll typically make interest-only payments during the build phase, and the lender will release funds to the builder as work is completed. Here’s how it works: 

• During construction, you will incur interest payments on the amount that has been drawn from the loan. The lender controls this draw process, ensuring that funds are released based on the progress of the construction. This step-by-step disbursement helps keep the project on track financially.
• Once the home is built, the construction loan is converted into a permanent mortgage, which you’ll start paying off like a regular home loan.

Combination loan (Construction-to-permanent loan)

A construction-to-permanent loan is another option for financing a new construction home. This type of loan combines a construction loan and a permanent mortgage into one single loan. It’s particularly convenient because you only have to go through the application and closing process once. Here’s how it works. 

• You save on closing costs and reduce paperwork because there’s only one closing for both the construction loan and the permanent mortgage.
• Often, the interest rate for the permanent mortgage is locked in at the start, which can protect you from rate fluctuations during the construction period.

Builder financing

Sometimes, builders offer their own financing options for new construction homes. These can be enticing because the builder might offer special incentives, such as paying some of the closing costs or offering lower rates. While these incentives can save money upfront, make sure to compare the builder’s financing with other lenders to ensure you’re getting the best deal overall. 

Last thoughts

While the sticker price of a new construction home might seem higher at first glance, the overall costs can be cheaper than buying an existing home. When you factor in reduced maintenance, lower energy costs, and potential savings on repairs, newly constructed homes present a compelling case.

Written by Ramona Sinha. August 27, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.