You would need to discuss this with the bank that holds the mortgage since you would be destroying their equity.

We did it. We did a construction loan that included the existing mortage amount on the home we tore down.

With that little equity in your home you'd likely be in deep trouble if you demolished without notice and the lender got wind of it.

sue - that's why I thought the answer might be no, that I had to own the house free and clear.

ehoops - I didn't think it could be done since there would be no collateral for the loan other than the land. Can you explain a little more? Are you finished, or still living in the cottage on wheels? :)

worthy - I didn't plan on not telling them, that would be crazy.

What would matter is how much your property is worth. Is the land without the house worth more than your current loan? If so I would think you could just get a construction loan and roll your current mortgage into that.

How were you planning on paying for building the house? If you need a loan to do so then your current mortgage would have a very high chance of finding out what you are doing since you'd have to disclose your mortgage to the lender and it would show up on your credit report. Who knows if they might contact them for some reason.

How about doing it as an addition to the house. Keep part of it and add on. Usually this means a tax savings too as the house will still be listed as a certain age and you'll save on the property taxes.

It sounds like there's plenty of equity in your lot. When you say your house is worth $150K, do you mean a builder would buy it for that -- for the land value? Or is that what you paid?

Tell us what your mortgage holder has to say!

I paid 150k for the house in March '06. The same houses that have been sold in the past 6 months as tear downs have brought 160k, so I guess I have 42k in equity. I would actually prefer to just add about 400sf, but that doesn't make good sense. Because it is just a carpy looking little house, even with an addition, it would still be a carpy looking house, only bigger ;) It would still be considered a tear down, so the cost of adding on, (which I would be happy with), would essentially be lost unless I kept it for quite awhile.

My mortgage holder is Countrywide.

It sounds like there's plenty of equity in your lot.

Equity, as the OP correctly understands, is the unencumbered market value of the property, i.e., what is left after the mortgage.

Well what I was suggesting with doing an addition and get around the current mortgage, was to get rid of most of the current house, but keep a small piece and then add on. Essentially like building a new home, but keeping a small part.

However if you are financing it you need to make sure that the cost you are financing along with your current mortgage that it will be worth at least those combined when finished.

Oh, worthy, I went back and forth on saying "value" instead of "equity". You are right.

weed30, this is exactly what we did! We still had an existing mortgage on the old property, but even torn down, the land our old house was on was worth more than our outstanding mortgage. Our bank was AWESOME working with us on our construction mortgage and we are only a couple weeks out from being done.

Basically, what was involved was opening a line of credit and getting an initial appraisal (the bank does this). Then we got pre-approved for the new mortgage, and the old mortgage is rolled over into the new one.

We used our line of credit to pay sub-trades (my DH was GC) and the appraiser comes out at 4 separate stages during your build. He assesses your completion rate and the bank forwards however much money that represents from your total approved mortgage to your Trustee. You then pay off the line of credit, usually with some left over, and you start over again until the next appraisal period.

It's been a very easy process, so I hope you go for it!

Lora

loralee, unfortunately, my land is not worth more than the existing mortgage.

To all, I did the pesky math thing, and realized that I would not be able to afford the mortgage once it was built, since it would include the current mortgage :(

200K to build, 118K on current, worth about 400 - 450 when done. So if I could afford the 318K or so mortgage, it would be a good move. Since I can't, I will just do a few things to make the house nicer for me, then consider building and selling at a later time so I could take advantage of the profit.

Thank you to all who responded.

Actually, if your statement upthread of "The same houses that have been sold in the past 6 months as tear downs have brought 160k" is true, then your property IS worth more than your current mortgage of 118K.

That's because the land is worth 160k to a builder -- because he has no more house once it's torn down!

The rest of your assumptions make sense -- don't get in over your head on a mortgage you can't afford. But, your property is worth more than you are giving it credit for.