Building your custom home allows you to design exactly what you want in a house. Bigger bathrooms? No problem. Home office? How about two? Ditto. But there are some financial considerations when choosing to build when compared with financing an existing home.

The first step is to design your house by employing an architect who can put your ideas into a workable plan. From that plan, you will gather enough information to get a materials list that will quantify exactly how many nails and how much drywall you will need. Plus, you'll need to determine how much labor is required to build your home and the cost of buying the land. This data is derived from your plans and specifications.

At this stage, you may find you don't have dollars to fund your project, so you need to find a lender to provide a short-term "construction" loan.

Construction loans will typically require some down payment if you don't already own the land. Money from a construction loan is not paid out at closing and your builder won't get one big check the moment the project begins. Instead, the lender will give the builder a specific percentage needed to start the job and to finish the house in phases.

Your first check to the builder could be for general site clearing, preparation and foundation work. As the initial phase is completed, the builder will return to the construction lender for money to continue on to the next phase. But the lender won't just write another check, they'll send someone to the property to verify the builder's claims that indeed phase one has been completed. And then phase two. And on and on until the home is finished and your construction funds have been exhausted. Then you need another type of financing: your "permanent" mortgage.

A permanent mortgage is used to pay off your short-term construction loan. While your construction financing may have terms such as the prime rate plus x percent for six months, your permanent mortgage could be a fixed-rate loan over 30 years, or pretty much any mortgage option available today.

Rather than one loan for construction and a second loan for permanent financing, a better option in some cases is a single loan that first covers construction costs and then converts to long-term financing. The advantage with a combo loan is one application, one closing, and fewer transaction costs.