tough question about building a house..?

Question

my co worker owns 2 acres and a house that still has a mortgage of 100,000 left. he wants to build another house on his land and then when its finished tear the current home down. how does this work? will he need to pay 2 mortgages and if he still owes what happens to that? also will he get any equity out of it? any info would be great about what happens financially when someone does this!! THANK you

HES AWARE OF THE 2ND MORTGAGE THATS WHAT IM ASKING HOW DOES THAT WORK ARE WE RIGHT TOTHINK HE CAN REFI OR HAVE 2 MORTGAGES!!thank you for all of those who did answer the question though

Answer 1

The borrower would get what is called a construction loan to build the second home on the property. A construction loan has 'draws' payable to the builder at completion percentages. While the construction phase happens the borrower only pays interest on the draws that have been funded. Once the home is complete, the appraisal process is done and the certificate of occupancy is issued - the construction loan "modifies' to a regular mortgage.

Now, the borrower has TWO mortgage payments. The borrower CAN refinance the new home to include the debt on the first home, then have it demo'd.

Hope this helps

Answer 2

First of all, he has to find out if they will allow him to build another building on his property. Sounds funny I know but some cities have restrictions that unless you verify you wouldn't know. He could tear the current house down but why does he want to? That doesn't erase the fact that he still owes on the house. If he does build another house on his property he will have two mortgages and then he stands a chance of losing both to foreclosure. That will ruin his chances of owning a home again, hi credit will be ruined for years and he will be out.

If he doesn't have at least 30% equity in the house he has then there is no solution other than just keep the house until he pays it off, then build the other house. He will not only get to keep the house he lives in but it will be free and clear to do what ever he wants with it. Then he can build his dream home elsewhere on the property without having to worry about two mortgages and a foreclosure.

Answer 3

He woudl probably need to get a construction loan for the new house and use $100,000 of that loan to pay off (i.e., refinance) the original mortgage loan. He won't get any equity out, but he will only have 1 mortgage if he does it this way.

Answer 4

He can't tear the existing home down until he pays off the mortgage. How would you get equity out of a place by destroying it??

Sounds like your coworker is a few french fries short of a Happy Meal to be honest.

Answer 5

He CANNOT do that without the agreement of the lender involved. If he reads his mortgage contract, he is bound to find language in it which states that he will 'keep the collateral property in good repair' or something similar. Tearing down the house does not qualify as keeping it in good repair.

That house and the land on which it rests are the collateral of the lender to whom he owes $100,000.

He is advised to consult with his current AND future mortgage holders as to how he might proceed.

Answer 6

why tear down this house, y not rent it out to pay the remaining mortgage and then it can finance the new house through rent, 2 acres is to much for just 1 house, it can be fenced off @ 1 acre each.

Answer 7

When you decide to tear that home down, ask the bank how they feel about their collateral being destroyed?

What on earth do you mean if he stills owes? Of course he will still owe almost 100K as you stated that will have to be paid off or rolled into the new mortgage. If rolled into the new mortgage then the new house would have to be worth 100K more that what is borrowed on it.

Did you think it would disappear into thin air?