Let's say I buy a home with an ordinary thirty-year mortgage, intending to renovate the house slowly and live there a long time (ten years at least). Five years into the mortgage, however, I decide I want to build a new house, but I would like to stay at the same address. In other words, I want to have the old house demolished, and build a new house on the now-empty lot (while I live in a rental), then move back in to the new house and live there indefinitely.
The new house will be bigger and better than the old, so once it's done, the real estate as a whole (land plus improvements) will be worth much more than the original loan amount.
Is there a loan product that covers this kind of process? Can I take out a construction loan to finance the new building, and then roll it into a conventional mortgage, the way that people do who are building houses on raw undeveloped lots? What happens to my old mortgage when I do this?
I suspect that the lienholder may not want me to destroy the old house since that reduces the value of the property (at least temporarily) to the value of the raw land, but what other option is there? What do people do who want to buy an old house for the location, but intend from the start to tear it down and build a new house? Can this only be done with a large cash outlay upfront?