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Construction loan for new house replacing existing mortgaged house?
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.