Construction loan for new house replacing existing mortgaged house?
So let's assume some values to better explain this.  For simplicity, all of these are in thousands: So in this example, you're going to destroy $250 in value, pay off the existing $150 loan and have to invest $300 in to build the new house and this example doesn't have enough equity to cover it.  You typically can't get a loan for much more than the (anticipated) property value. Basically, you need to get a construction loan to cover paying off the existing loan plus whatever you want to spend to pay for the new house minus whatever you're planning to contribute from savings.  This new loan will need to be for less than the new total market value.  The only way this will work out this way is if you bring significant cash to closing, or you owe less than the lot value on the current property. Note, that this is in effect a simplification.  You can spend less building a house than it's worth when you're done with it, etc., but this is the basic way it would work - or NOT work in most cases. "Presumably the existing house has some value. If you demolish the existing house, you are destroying that value. If the value of the new house is significantly more than the value of the old house, like if you're talking about replacing a small, run-down old house worth $50,000 with a big new mansion worth $10,000,000, then the value of the old house that is destroyed might just get lost in the rounding errors for all practical purposes. But otherwise, I don't see how you would do this without bringing cash to the table basically equal to what you still owe on the old house. Presumably the new house is worth more than the old, so the value of the property when you're done will be more than it was before. But will the value of the property be more than the old mortgage plus the new mortgage? Unless the old mortgage was almost paid off, or you bring a bunch of cash, the answer is almost certainly ""no"". Note that from the lienholder's point of view, you are not ""temporarily"" reducing the value of the property. You are permanently reducing it. The bank that makes the new loan will have a lien on the new house. I don't know what the law says about this, but you would have to either, (a) deliberately destroy property that someone else has a lien on while giving them no compensation, or (b) give two banks a lien on the same property. I wouldn't think either option would be legal.  Normally when people tear down a building to put up a new building, it's because the value of the old building is so low as to be negligible compared to the value of the new building. Either the old building is run-down and getting it into decent shape would cost more than tearing it down and putting up a new building, or at least there is some benefit -- real or perceived -- to the new building that makes this worth it."
Just as a renter doesn't care what the landlord's mortgage is, the buyer of a house shouldn't care what the seller paid, what the current mortgage is, or any other details of the seller's finances.  Two identical houses may be worth $400K. One still has a $450K loan, the other is mortgage free. You would qualify for the same value mortgage on both houses. All you and your bank should care about is that the present mortgage is paid or forgiven by the current mortgage holder so your bank can have first lien, and you get a clean title.  To answer the question clearly, yes, it's common for a house with a mortgage to be sold, mortgage paid off, and new mortgage put in place. The profit or loss of the homeowner is not your concern. "This is the best tl;dr I could make, [original](http://www.news.com.au/finance/economy/australian-economy/issuing-new-loans-against-unrealised-capital-gains-has-created-an-australian-house-of-cards/news-story/853e540ce0a8ed95d5881a730b6ed2c9) reduced by 87%. (I'm a bot) ***** &gt; THE Australian mortgage market has &amp;quot;Ballooned&amp;quot; due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion &amp;quot;House of cards&amp;quot;, a new report warns.  &gt; The report describes the system as a &amp;quot;Classic mortgage Ponzi finance model&amp;quot;, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.  &gt; Melbourne&amp;#039;s median house price has risen by 12.7 per cent over the past year to $695,500, with Brisbane up 3 per cent to $488,757, Adelaide 5.2 per cent to $430,109, Hobart 13.6 per cent to $383,438 and Canberra 12.9 per cent to $575,173.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6z9ea1/issuing_new_loans_against_unrealised_capital/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~207582 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **property**^#1 **per**^#2 **cent**^#3 **report**^#4 **market**^#5" You're in the same situation I'm in (bought new house, didn't sell old house, now renting out old house). Assuming that everything is stable, right now I'd do something besides pay down your new mortgage. If you pay down the mortgage at your old house, that mortgage payment will go away faster than if you paid down the one on the new house.  Then, things start to get fun.  You then have a lot more free cash flow available to do whatever you like. I'd tend to do that before searching for other investments.  Then, once you have the free cash flow, you can look for other investments (probably a wise risk) or retire the mortgage on your residence earlier. In short, your scenario could work in theory, but is not realistic... Generally speaking, you can borrow up to some percentage of the value of the property, usually 80-90% though it can vary based on many factors.  So if your property currently has a value of $100k, you could theoretically borrow a total of $80-90k against it.  So how much you can get at any given time depends on the current value as compared to how much you owe.  A simple way to ballpark it would be to use this formula: (CurrentValue * PercentageAllowed) - CurrentMortgageBalance = EquityAvailable.     If your available equity allowed you to borrow what you wanted, and you then applied it to additions/renovations, your base property value would (hopefully) increase.  However as other people mentioned, you very rarely get a value increase that is near what you put into the improvements, and it is not uncommon for improvements to have no significant impact on the overall value.  Just because you like something about your improvements doesn't mean the market will agree. Just for the sake of argument though, lets say you find the magic combination of improvements that increases the property value in line with their cost.  If such a feat were accomplished, your $40k improvement on a $100k property would mean it is now worth $140k.  Let us further stipulate that your $40k loan to fund the improvements put you at a 90% loan to value ratio.  So prior to starting the improvements you owed $90k on a $100k property.  After completing the work you would owe $90k on what is now a $140k property, putting you at a loan to value ratio of ~64%.  Meaning you theoretically have 26% equity available to borrow against to get back to the 90% level, or roughly $36k.  Note that this is 10% less than the increase in the property value.  Meaning that you are in the realm of diminishing returns and each iteration through this process would net you less working capital. The real picture is actually a fair amount worse than outlined in the above ideal scenario as we have yet to account for any of the costs involved in obtaining the financing or the decreases in your credit score which would likely accompany such a pattern.  Each time you go back to the bank asking for more money, they are going to charge you for new appraisals and all of the other fees that come out at closing.  Also each time you ask them for more money they are going to rerun your credit, and see the additional inquires and associated debt stacking up, which in turn drops your score, which prompts the banks to offer higher interest rates and/or charge higher fees... Also, when a bank loans against a property that is already securing another debt, they are generally putting themselves at the back of the line in terms of their claim on the property in case of default.  In my experience it is very rare to find a lender that is willing to put themselves third in line, much less any farther back.  Generally if you were to ask for such a loan, the bank would insist that the prior commitments be paid off before they would lend to you.  Meaning the bank that you ask for the $36k noted above would likely respond by saying they will loan you $70k provided that $40k of it goes directly to paying off the previous equity line. "This seems to be a very emotional thing for people and there are a lot of conflicting answers.  I agree with JoeTaxpayer in general but I think it's worth coming at it from a slightly different angle. You are in Canada and you don't get to deduct anything for your mortgage interest like in the US, so that simplifies things a bit.  The next thing to consider is that in an amortized mortgage, the later payments include increasingly more principal.  This matters because the extra payments you make earlier in the loan have much more impact on reducing your interest than those made at the end of the loan. Why does that matter?  Let's say for example, your loan was for $100K and you will end up getting $150K for the sale after all the transaction costs.  Consider two scenarios: If you do the math, you'll see that the total is the same in both scenarios.  Nominally, $50K of equity is worth the same as $50K in the bank. ""But wait!"" you protest, ""what about the interest on the loan?""  For sure, you likely won't get 2.89% on money in a bank account in this environment.  But there's a big difference between money in the bank and equity in your house: you can't withdraw part of your equity.  You either have to sell the house (which takes time) or you have to take out a loan against your equity which is likely going to be more expensive than your current loan. This is the basic reasoning behind the advice to have a certain period of time covered.  4 months isn't terrible but you could have more of a cushion.  Consider things like upcoming maintenance or improvements on the house.  Are you going to need a new roof before you move?  New driveway or landscape improvements?  Having enough cash to make a down-payment on your next home can be a huge advantage because you can make a non-contingent offer which will often be accepted at a lower value than a contingent offer. By putting this money into your home equity, you essentially make it inaccessible and there's an opportunity cost to that.  You will also earn exact 0% on that equity.  The only benefit you get is to reduce a loan which is charging you a tiny rate that you are unlikely to get again any time soon. I would take that extra cash and build more cushion.  I would also put as much money into any tax sheltered investments as you can.  You should expect to earn more than 2.89% on your long-term investments.  You really aren't in debt as far as the house goes as long as you are not underwater on the loan: the net value of that asset is positive on your balance sheet.  Yes you need to keep making payments but a big account balance covers that.  In fact if you hit on hard times and you've put all your extra cash into equity, you might ironically not being able to make your payments and lose the home. One thing I just realized is that since you are in Canada, you probably don't have a fixed-rate on your mortgage.  A variable-rate loan does make the calculation different.  If you are concerned that rates may spike significantly, I think you still want to increase your cushion but whether you want to increase long-term investments depends on your risk tolerance." "The first red-flag here is that an appraisal was not performed on an as-is basis - and if it could not be done, you should be told why. Getting an appraisal on an after-improvement basis only makes sense if you are proposing to perform such improvements and want that factored in as a basis of the loan. It seems very bizarre to me that a mortgage lender would do this without any explanation at all. The only way this makes sense is if the lender is only offering you a loan with specific underwriting guidelines on house quality (common with for instance VA-loans and how they require the roof be of a certain maximum age - among dozens of other requirements, and many loan products have their own standards). This should have been disclosed to you during the process, but one can certainly never assume anyone will do their job properly - or it may have only mentioned in some small print as part of pounds of paper products you may have been offered or made to sign already. The bank criteria is ""reasonable"" to the extent that generally mortgage companies are allowed to set underwriting criteria about the current condition of the house. It doesn't need to be reasonable to you personally, or any of us - it's to protect lender profits by aiding their risk models. Your plans and preferences don't even factor in to their guidelines. Not all criteria are on a a sliding scale, so it doesn't necessarily matter how well you meet their other standards. You are of course correct that paying for thousands of dollars in improvements on a house you don't own is lunacy, and the fact that this was suggested may on it's own suggest you should cut your losses now and seek out a different lender.  Given the lender being uncooperative, the only reason to stick with it seems to be the sunk cost of the appraisal you've already paid for. I'd suggest you specifically ask them why they did not perform an as-is appraisal, and listen to the answer (if you can get one). You can try to contact the appraiser directly as well with this question, and ask if you can have the appraisal strictly as-is without having a new appraisal. They might be helpful, they might not. As for taking the appraisal with you to a new bank, you might be able to do this - or you might not. It is strictly up to each lender to set criteria for appraisals they accept, but I've certainly known of people re-using an appraisal done sufficiently recently in this way. It's a possibility that you will need to write off the $800 as an ""education expense"", but it's certainly worth trying to see if you can salvage it and take it with you - you'll just have to ask each potential lender, as I've heard it go both ways. It's not a crazy or super-rare request - lenders backing out based on appraisal results should be absolutely normal to anyone in the finance business. To do this, you can just state plainly the situation. You paid for an appraisal and the previous lender fell through, and so you would like to know if they would be able to accept that and provide you with a loan without having to buy a whole new appraisal. This would also be a good time to talk about condition requirements, in that you want a loan on an as-is basic for a house that is inhabitable but needs cosmetic repair, and you plan to do this in cash on your own time after the purchase closes. Some lenders will be happy to do this at below 75%-80% LTV, and some absolutely do not want to make this type of loan because the house isn't in perfect condition and that's just what their lending criteria is right now.  Based on description alone, I don't think you really should need to go into alternate plans like buy cash and then get a home equity loan to get cash out, special rehab packages, etc. So I'd encourage you to try a more straight-forward option of a different lender, as well as trying to get a straight answer on their odd choice of appraisal order that you paid for, before trying anything more exotic or totally changing your purchase/finance plans." "Assumption - you live in a country like Australia, which has ""recourse"" mortgages. If you buy the apartment and take out a mortgage, the bank doesn't care too much if your apartment gets built or not. If the construction fails, you still owe the bank the money." You could consider turning your current place into a Rental Property. This is more easily done with a fixed rate loan, and you said you have an ARM. The way it would work: If you can charge enough rent to cover your current mortgage plus the interest-difference on your new mortgage, then the income from your rental property can effectively lower the interest rate on your new home.   By keeping your current low rate, month-after-month, you'll pay the market rate on your new home, but you'll also receive rental income from your previous home to offset the increased cost. Granted, a lot of your value will be locked up in equity in your former home, and not be easily accessible (except through a HELOC or similar), but if you can afford it, it is a good possibility. You're effectively looking for a mortgage for a new self-build house.  At the beginning, you should be able to get a mortgage based on the value of the land only.  They may be willing to lend more as the build progresses. Try to find a company that specializes in this sort of mortgage. "Construction loans are typically short term that then get rolled into conventional mortgages at the end of the construction period. Since the actual construction loan is short term, you cannot combine it with a long-term land loan as well. You could do the two separate loans up front to buy the land and finance the construction, then at the end roll both into a conventional mortgage to close out the land and construction loans. This option will only work if you do all three through the same lender. Trying to engage various lenders will require a whole new refinance process, which I very much doubt you would want to go through. These are sometimes called combo loans, since they aggregate several different loan products in one ""transaction."" Not a lot of places do land loans, so I would suggest first find a lender that will give you a land loan and set an appoint with a loan representative. Explain what you are trying to do and see what they can offer you. You might have better luck with credit unions as well instead of traditional banks." The underlying investment is usually somewhat independent of your mortgage, since it encompasses a bundle of mortgages, and not only yours. It works similarly to a fund. When, you pay off the old mortgage while re-financing, the fund receives the outstanding debt in from of cash, which can be used to buy new mortgages. If you intend to flip this property, you might consider either a construction loan or private money. A construction loan allows you to borrow from a bank against the value of the finished house a little at a time. As each stage of the construction/repairs are completed, the bank releases more funds to you. Interest accrues during the construction, but no payments need to be made until the construction/repairs are complete.  Private money works in a similar manner, but the full amount can be released to you at once so you can get the repairs done more quickly. The interest rate will be higher. If you are flipping, then this higher interest rate is simply a cost of doing business. Since it's a private loan, you ca structure the deal any way you want. Perhaps accruing interest until the property is sold and then paying it back as a single balloon payment on sale of the property. To find private money, contact a mortgage broker and tell them what you have in mind.  If you're intending to keep the property for yourself, private money is still an option. Once the repairs are complete, have the bank reassess the property value and refinance based on the new amount. Pay back the private loan with equity pulled from the house and all the shiny new repairs. The cleanest way to accomplish this is to make the purchase of your new house contingent on the sale of your old one.  Your offer should include that contingency and a date by which your house needs to sell to settle the contract.   There will also likely be a clause that lets the seller cancel the contract within a period of time (like 24-48 hours) if another offer is received.  This gives you (the buyer) at least an opportunity to either sell the house or come up with financing to complete the deal. For example, suppose you make an offer to buy a house for $300,000 contingent on the sale of your house, which the seller accepts.  In the meantime, the seller gets an offer of $275,000 in cash (no contingency).  The seller has to notify you of the offer and give you some time to make good on your offer, either by selling your house or obtaining $300,000 in financing.  If you cannot, the seller can accept the cash offer. This is just a hypothetical example; the offer can have whatever clauses you agree to, but since sale contingencies benefit the buyer, the seller will generally want some compensation for that benefit, e.g. a larger offer or some other clause that benefits them. Or do I find a house to buy first, set a closing date far out and then use that time to sell my current one? Most sellers will not want to set a closing date very far out.  Contingency clauses are far more common. In short, yes it's possible, and any competent realtor should be able to handle it.  It also may mean that you have to either make a higher offer to compensate for the contingency and to dissuade the seller from entertaining other offers, or sell your home for less than you'd like to get the cash sooner.  You can weigh those costs against the cost of financing the new house until yours sells. If they own the old house outright, they can mortgage it to you. In many jurisdictions this relieves you of the obligation to chase for payment, and of any worry that you won't get paid, because a transfer of ownership to the new owner cannot be registered until any charge against a property (ie. a mortgage) has been discharged. The cost of to your friends of setting up the mortgage will be less than the opulent interest they are offering you, and you will both have peace of mind. Even if the sale of the old house falls through, you will still be its mortgagee and still assured of repayment on any future sale (or even inheritance). Complications arise if the first property is mortgaged. Although second mortgages are possible (and rank behind first mortgages in priority of repayment) the first mortgagee generally has a veto on the creation of second mortgages. "To some extent, I suppose, most people are okay with paying Some taxes. But, as they teach in Intro to Economics, ""Decisions are made on the margin"". Few are honestly expecting to get away with paying no taxes at all. They are instead concerned about how much they spend on taxes, and how effectively. The classic defense of taxes says ""Roads and national defense and education and fire safety are all important."" This is not really the problem that people have with taxes. People have problems with gigantic ongoing infrastructure boondoggles that cost many times what they were projected to cost (a la Boston's Big Dig) while the city streets aren't properly paved. People don't have big problems with a city-run garbage service; they have problems with the garbagemen who get six-figure salaries plus a guaranteed union-protected job for life and a defined-benefit pension plan which they don't contribute a penny to (and likewise for their health plans). People don't have a big problem with paying for schools; they have a big problem with paying more than twice the national average for schools and still ending up with miserable schools (New Jersey). People have a problem when the government issues bonds, invests the money in the stock market for the public employee pension plan, projects a 10% annual return, contractually guarantees it to the employees, and then puts the taxpayers on the hook when the Dow ends up at 11,000 instead of ~25,000 (California). And people have a problem with the attitude that when they don't pay taxes they're basically stealing that money, or that tax cuts are morally equivalent to a handout, and the insinuation that they're terrible people for trying to keep some of their money from the government."