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My wife and I own a home that is over 60 years old that we bought initially as a fixer-upper. After a few years of fixing it up enough to make it comfortable for us -- we realized that our appetite for doing renovations and repairs has been exhausted. The home has still has a mortgage on it of about $185K and, due to it being in a good location, is apparently worth over $400k (which is much more than what we bought it for). Also -- considering the location -- developers have recently been snapping up homes similar to ours in our neighborhood, tearing them down and rebuilding larger, nicer homes -- that are being sold for over $1mil. Looking at the high market value of newer, larger homes in our area, we've been seriously considering rebuilding (expecting that the sell to a bank for a construction loan would be easy). However, considering that we still have our mortgage -- we're not sure if that's possible. Is it possible to rebuild when the original home has a mortgage?

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    Which country are you in?
    – Flux
    Commented Nov 10, 2020 at 7:45
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    How does that saying go? "Once you get your house the way you like it, it's time to... knock it down and rebuild it!" ;)
    – TTT
    Commented Nov 10, 2020 at 14:31
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    Mark, please consider this: if someone sold you a piece of land for what you paid for your house, would you take that deal? Because that's essentially what you're doing. "Yeah but Im gonna build a new house on top of the existing land and sell it for a profit" has a lot of variables in this complicated "house flipping" equation.
    – 8protons
    Commented Nov 10, 2020 at 22:07
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    What does your bank say? Couldn't you just phone them to discuss it? It seems a fairly straight forward question, will you give us more money to rebuild the house on the current land using the land value itself as collateral?
    – Jontia
    Commented Nov 11, 2020 at 12:42
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    Where do you plan on living while your home is being torn down and replaced with a much more expensive one? Commented Nov 12, 2020 at 0:14

3 Answers 3

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The main complication is that you're destroying the collateral for a loan that you owe almost $200k on. Builders can do this because they're including their profit margin in the equity on the new loan. Since you're having a new house built, you would need to make sure that the construction cost plus the $185K you currently owe is sufficiently less than the market value of the house. If the value of the land alone is sufficiently high (meaning the cost of the actual house is much less than the resale value of the entire property) then it may be possible.

It may be cleaner to sell your house, using the equity that you've built up as a down payment on a newer, bigger house. Let the person that buys your house destroy its equity if they want.

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    "Flipping" houses is work. Just sell and buy what you want since you don't want to renovate anymore. Commented Nov 10, 2020 at 19:28
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    That's a good question -- I just confirmed that the land is much more valuable than the house according the the county tax assessor -- much more than what we owe in the existing mortgage. Selling and buying is pretty hard where we are -- the entire region's home values have been going up. If we were to sell and buy another house we wouldn't be able to afford to get the house we want -- we'd end up in a similarly dated home. However, if we can swing it, we could afford the going costs of the new home if we built where we are now.
    – Mark
    Commented Nov 10, 2020 at 22:34
  • @Mark It is generally the case that the land is worth more than the house.
    – Mohair
    Commented Nov 10, 2020 at 22:50
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    @Mohair That's very location dependent. My land is worth a fraction of the house that's on it.
    – D Stanley
    Commented Nov 10, 2020 at 23:04
  • Of course, the county tax assessor has every incentive to say the land and the house are worth a staggering amount of money. You'll have to get a professional appraisal.
    – Kyralessa
    Commented Nov 16, 2020 at 12:32
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I agree with D. Stanley's answer and started a comment that was getting a bit long.

One option here might be to get completely new loan that covers not only the construction but the remaining balance on the existing mortgage. At first this seemed unlikely to fly but it's not too different from getting a loan to buy a plot of undeveloped land and build a home on it. If the value of the land is more than $185K, I'm struggling to see what would prevent a bank from giving you the loan in the absence of any other reasons. By closing out the existing loan you eliminate complications around the collateral for that loan. It's also likely that the lender will want some guarantees on the new construction so you will need plans, permits, and a builder before you get the loan. When the old loan is closed out, that lender no longer has any interest in your existing home and the new loan will be associated with the new build and the land, not the existing building. Additionally, you can use a different lender for the new loan which opens up your options.

A couple of other thoughts: consider using the existing structure (such as the foundation) as part of the new home. Also, we have to assume you can afford this new mortgage which would be expected to be significantly more expensive but don't forget how it might change your tax situation. If your are doubling or tripling the value of the home, I would expect the property tax burden to likewise increase.

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    speaking of reusing the existing structure -- in some places, they will leave one wall of the old home up (although it possibly gets replaced at some other point) so that it counts as a 'renovation' to avoid fees that would be required with new construction. (like connecting to utilities)
    – Joe
    Commented Nov 11, 2020 at 20:08
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Building a house is expensive. It is not just the cost of building but also various fees for getting a permit, etc and in your case demolition of the old house and also possibly ground work if you do want to be limited by the foundations of your old house or they are no longer good. You should also not forget that building takes time and you will need a place to live during that time.

Considering this, it is highly unlikely that you will get this project financed. It also means that your new house will be a load more expensive than it seems as you pay off the 185k and the demolition cost as well.

For me it seems much more sensible to take some more money from the bank and let the renovations be done by a professional. Apart from not spending your evenings and weekends renovating, it will be done much faster when someone is working full time on it. This depends a bit on how much needs to be done

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