How to Budget the Cost of Building a Home

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The architect's illustration of what the interior of the finished Sun Cottage might look like.
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For our example in this series of articles on planning and building an energy-efficient home, we've chosen the two-bedroom Sun Cottage, an expandable earth-sheltered, passive solar plan with 1,023 square feet. 

All too many of us have found that building an energy-efficient home seems to be a dream, a fantasy that’s kept just out of reach by escalating prices and high interest rates that contribute to the high cost of building a home. Of course, MOTHER has long been exploring ways of breaking this vicious circle of waste, and one inventor of solutions–whose work we’ve shown you before (starting back in 1981, in an article on earth-sheltered architecture)–is architect Angus W. Macdonald. Angus has developed a number of housing designs that apply low-cost building techniques to passive solar, earth-tempered homes, and he’s agreed to relate, in a series of articles that will span at least six issues of MOTHER, much of what he’s learned about planning and building such structures. The series will follow the actual construction of one of the architect’s standard designs–Sun Cottage–and will include photos and illustrations of each step.

In our last issue, we covered the criteria for selecting a site for a passive solar, earth-sheltered home. In this installment, we’ll discussing detail–another vital pre-groundbreaking step: making (and maintaining) a budget.

Although effective construction-cost control of a sun-heated dwelling means that you’ll have to do a lot of homework before and during the actual building, the payoff for your care will be well worth the effort. Basically, you’ll be creating equity in solar real estate, housing that–with the inevitable inflation and rising fuel costs ahead–will increase many times in value in future years. Also, by budgeting carefully, you’ll avoid funding shortfalls, and the heartbreak of an unfinished house and an empty pocketbook.

When you’re choosing the plan for your new home, you’ll obviously have to be constantly aware of your construction budget. But how do you come up with that figure to begin with? There are several methods, depending on your current financial status and what your expectations are. For example, perhaps you plan to sell your present house to finance the construction of the new, more energy-efficient one. In that case, you’ll be building with a fixed-sum budget, one that will be determined by what you can reasonably expect to have after all the selling and moving expenses (along with the purchase price of new land) have been subtracted from the proceeds of the sale.

Maybe you have a steady job and plan to pay for your new home on a monthly basis, with a mortgage. If so, the amount of money that you can spend on your home’s construction will be determined by the monthly loan payment you can afford. The usual rule of thumb for calculating this figure has been to allot one-quarter of your monthly gross income. To cope with the high interest rates that have prevailed for the last several years, however, many lenders are now allowing borrowers to devote a third of their earnings to a mortgage payment.

Whichever percentage you end up using–and I recommend that you be sensibly cautious and choose the lower of the two–be sure to subtract overhead and utility costs from the fraction of your income earmarked for your house. Fortunately, insurance rates will be comparatively low for a Sun Cottage because of its fireproof construction, and our earth-tempered, passive solar design should require next to no space heating. There will be energy expenses for lighting, cooking, and so on, though, and you’ll also have property taxes to pay. (One good guideline to help you judge what monthly payment you might be comfortable with is to evaluate how easy or hard it is for you to meet your present rent or mortgage.)

Interest rates are–as of this writing–about 10 3/4% for government programs and 11 3/4 to 12% for commercial loans. I’ve included a 30-year mortgage table at the end of this article to show you how a few monthly payment amounts compare to the sum borrowed.

Since today’s inflationary monetary policy means interest rates are bound to rise again, you should consider only a fixed-rate mortgage. Your bank should be willing to write one, but if it’s not, find a mortgage broker. This person represents large investors (such as insurance companies) and writes either commercial or government loans, depending on your needs and qualifications.

Once you’ve arranged for a mortgage, many banks will lend you the majority of the money needed to build the structure. The funds don’t come as a lump sum, however, but are paid for different completed stages of construction,and not until the lenders have inspected the work.

After you determine the total limit of your budget, you’ll need to provide part of that for land development costs. These will vary with each site, but fall into four categories: access, sewage disposal, utility supply, and legal costs.

The access road to the site must be suitable for heavy construction vehicles, as well as for your own use. Get bids from grading and clearing contractors to find out exactly how much the work will cost, and don’t be surprised if it’s more than you expected (even the least expensive gravel drive and turnaround will run $1,000).

The cost of sewage disposal will depend on what the local health inspector requires at your site. Septic tanks and drainage fields may run as much as $2,000. At the less expensive end of the scale, even a municipal hookup will be accompanied by a charge.

Contact the power company to arrange for an electrical connection (which will be needed during construction), and notify the telephone company, too. If you’ll be using a public water supply, that hookup will carry an installation charge with it. The price of having your own water source dug can be estimated by reviewing local well depths and applying the prevailing per-foot charge that your area’s drillers ask.

I’ve lumped the construction loan interest, loan clearing costs, owner’s liability and property insurance during construction, and building permits in the “legal” category. Don’t forget to include the cost of the design itself (an architect’s or engineer’s fee). Your professional designer, the building official, and your insurance and real estate agents will be able to pinpoint these figures for you.

Now, add up all these estimated land development costs and subtract this total from your construction budget. The remainder is what you can actually spend to build the house. Knowing that figure will obviously help you determine what plan to select.

Of course, the method of construction that you choose will also influence the amount of square footage you’ll be able to afford. As I write, fully contracted buildings run about $42 per square foot in my part of the country, but many owner-assisted construction jobs are coming in at between $18 and $24 per square foot. In fact, some owner-builders have erected their passive solar, earth-sheltered houses for as little as $10 per square foot! At the lowest of these costs, you could afford at least four times as much house as you could at turnkey prices! However, the amount of time and effort you can afford to devote to construction–along with your level of building skills–will govern your degree of participation (and the associated savings). Also, as you approximate those factors, bear in mind that it takes professionals about three months to erect a two- or three-bedroom home of between 1,000 and 1,500 square feet.

The number of bedrooms and baths–and the interior layout in general–will naturally reflect your current lifestyle, but it’s a good idea to allow for some changes. If you have a growing family but a small building budget, for example, you should select a plan that will permit you to add on easily, and you’ll want to position your home so that the addition won’t congest the site.

Be certain that your plan conforms to local building codes and ordinances. The stipulations are numerous and in some instances quite particular, so if you have any doubts, be sure to review the plans with your building official. (One provision that often affects earth-tempered housing is that bedrooms must have emergency escape paths, in the form of exterior doors or operable windows.)

If your loan is through the Federal Housing Administration or the Veterans’ Administration, you’ll also have to conform to the Housing and Urban Development Department’s Minimum Property Standards. To establish that your home will meet these requirements, you’ll have to furnish these agencies with copies of your site plan, material specification sheet, and working drawings, plus “Manual-J Heat Gain, Heat Loss Calculations.” Ask your agent for a copy of the VA’s “Required Exhibits to Accompany Request for Determination of Reasonable Value, Proposed Construction Cases,” Pamphlet No. 26A-3. The VA or FHA will review three copies of your completed submission and tell you the amount they’ll lend you to build the house. This evaluation will cost about $75 and should be added to “legal costs.”

Once you’ve settled on a plan, calculate the amounts of all major materials and finishes. Make an itemized cost estimate for these materials in order to see just what you’ll be spending for doors, windows, masonry, reinforcing steel, etc. (Your architect or builder may supply a list, upon request.) Parts of a solar-heated building qualify for federal and state conservation and solar tax credits, so such items as insulation and those pertaining to solar heating, storage, and distribution should be totaled separately to help you calculate your tax credit for the year when you build. Be sure to check your cost estimate for accuracy with suppliers and contractors, and don’t sign any contract until you’re satisfied that the total will be within your estimate.

When the time finally comes to build, purchase as many of the materials as you can in advance. Not only will this help you stay ahead of inflation, but it will also insure that built-in items fit properly. If the windows, doors, and other fixtures are stored in a shed or trailer at the site, workers can refer to them during construction for measurements and details. (Do, of course, insure everything you store at the site against theft and damage, and follow your insurance company’s recommendations concerning security.)

Then, as construction proceeds, keep complete records of all purchases and labor payments, and compare those receipts with your cost estimate. Thus, you’ll be able to nip cost overruns in the bud and complete your home within budget.

Abbreviated 30-Year Mortgage Table

10 3/4% Interest

Monthly Payment: $250
Mortgage: $26,767

Monthly Payment: $350
Mortgage: $37,473

Monthly Payment: $450
Mortgage: $48,180

Monthly Payment: $550
Mortgage: $58,887

12% Interest

Monthly Payment: $250
Mortgage: $24,295

Monthly Payment: $350
Mortgage: $34,014

Monthly Payment: $450
Mortgage: $43,732

Monthly Payment: $550
Mortgage: $53,450

EDITOR’S NOTE: For our example in this series of articles, we’ve chosen the two-bedroom Sun Cottage, an expandable earth-sheltered, passive solar plan with 1,023 square feet and an estimated building cost of $20,625 (assuming some owner assistance in construction). Angus W. Macdonald has drawn this plan according to HUD’s Minimum Property Standards and the Building Officials and Code Administrators’ (BOCA) building codes. For the previous article in this series, see Building the Sun Cottage Part I: Site Selection.