We currently own a home with a really fantastic mortgage rate. Long term, the current state of the home won't meet our needs.

We're looking into several options for making the home work for us long term. The two main options are:

  1. doing a gut rehab + adding an addition
  2. tearing down the house and building a new house

According to my research, the second option would (for obvious reasons) require us to pay off the existing mortgage, where the first option would (likely?) not. At the time of this writing and based on conversations we have have with builders, the cost difference between the two options seems remarkably close, to the point close enough that it would just make more sense to build new and get exactly what we want.

But . . . the cost of "losing" the existing mortgage and getting another at current rates will be over $300k over the course of the loan.

Outside of random people posting their experience and opinions on the internet, I can't find any good information about where mortgage companies draw the line on rehab vs. rebuild. I understand that the true answer will be specific to my mortgage and lender, but I'd like to understand if there are general guidelines or rules of thumb on what is allowed.

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    I find it hard to believe a gut rehab and addition would cost about the same as tearing down and building new. It should cost significantly more to build new. Have you gotten at least three different general contractor quotes?
    – adamaero
    Commented May 21 at 1:01
  • I overstated how close the numbers would be a little. Edited the question. We have indeed gotten multiple quotes. Commented May 21 at 2:18
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    @JonathanReez We could speculate about that and other potential unintended consequences of violating the terms of a mortgage (the answers already suggests some) but turning all questions about the rules into “how can I avoid getting caught” doesn't seem particularly helpful.
    – Relaxed
    Commented May 22 at 15:37
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    @JonathanReez Loan servicers hire people to drive by and inspect the property, called a field inspection. They're looking to make sure it hasn't been abandoned, any signs of occupancy fraud (rental signs), being kept in good repair. This would be very obvious in the gut and teardown scenarios.
    – user71659
    Commented May 22 at 19:44
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    @JonathanReez I have no idea what the rules actually are and do not mean to comment one way or another. What I wanted to point out is that it is a valid question and the fact that many people ignore them without facing negative consequences is simply not relevant. It's easy to find things (insurance terms, speed limits, immigration rules) that people ignore daily without facing consequences and yet can have catastrophically bad consequences in some circumstances (e.g. if someone with a grunge tips the authorities or if some unrelated accident forces an investigation).
    – Relaxed
    Commented May 22 at 22:21

2 Answers 2


Two important aspects to consider are habitability and collateral.

Many mortgages (or the insurance policy required by the mortgage) stipulate some kind of occupancy requirement, meaning that the bank or insurer expects someone to live in the house. A major renovation that makes the property uninhabitable for a significant length of time might violate the terms of your loan or insurance policy.

Another aspect to consider is that a mortgage is a secured loan that is backed by the value of your house. Renovations that temporarily reduce the value of the house run into the issue of having insufficient collateral to back the loan. Imagine if you start construction, tear out the roof and all the plumbing and electrical, and then decide to abandon the project and stop paying the loan - the bank would be left with a house worth less than the loan is for. An addition likely wouldn't run into this problem, but a gut rehab might.

Overall, you'll have more luck keeping your mortgage if you can keep the house habitable and not significantly reduce its value during the renovation.

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    Wonder if sequencing the project with this in mind can help... addition first, then major renovations?
    – nitsua60
    Commented May 21 at 0:51
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    Thanks--this is a great answer. My mind also goes straight to what @nitsua60 comment is asking. Commented May 21 at 2:23
  • For sequencing you could also do the renovation 1 room at a time, thus keeping the home itself mostly intact during the process. Commented May 21 at 2:38
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    @JonathanReez Occupancy fraud is a rather common form of mortgage fraud. Owner-occupied homes are lower risk than investment properties since an occupant takes care of the house, and borrowers are more motivated to not lose the house they live in. A lender may charge a higher rate if the house is left vacant, and you may violate your loan terms if you agree to live in the house but don't. investopedia.com/terms/o/occupancyfraud.asp Commented May 22 at 14:29
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    @JonathanReez And you've read the fine print on their mortgage or actively questioned them on why they are not trying to defraud their lender and how to do it? At this point, I am used to your pushing this on SE but I still find the idea fascinating.
    – Relaxed
    Commented May 22 at 15:41

Talk to the bank.

If you have a reasonable income/mortage ratio, and a good plan for the renovations the bank should say OK.

After all, the end result will be a house worth more than before and therefore being a better collateral. The important part is convincing the bank you will reach that point.

A detailed quote from a reputable company counts as a good plan.

It is possible that bank regrets the good terms they gave you on the mortgage. This might make them reluctant to allow anything.

I would still recommend negotiating with them rather than trying to do a "value-preserving" renovation behind their back.

That can very easy end up with a letter from the bank asking for all their money back at the least convenient time. You could possibly win a court case against them, but that would be a very costly way to be right.

Don't go there. Talk to the bank, get their agreement to the plans.

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    When you say 'bank' I assume you mean the loan servicer? I'm in a similar boat to OP, though a year out, and hadn't even considered the impact to the mortgage for building an expansion. Commented May 21 at 15:29
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    @DavidJacobsen I am not used to the separation of lender and servicer, not how we do things in Norway. But they need to talk to whoever has the authority to grant them this permission. Perhaps start by talking to the servicer and possibly be referred to the lender? Commented May 22 at 10:25

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