We bought a tear down house on a great lot. We kept the old house up while we were planning the new house, because if anything should fall through or if you can't get a construction loan (not an easy task in today's market), it is much harder to sell a lot without a house, at least in my neck of the woods, because of loan issues.

We tore down the old house when we had full approval on the construction loan and closed on it.

I have seen quite a few houses where people lived in the old house and built a new house, and in most cases, it was a bit of a missed opportunity to build around an old house. I think it would be much better to plan a new house build considering the entire lot.

As far as whether to sell the house you are currently living in, you might want to explore the construction loan market in your area before making that decision. When we got a construction loan, we ended up having to put more than 35% down, including paying off the entire price of the lot that we bought. If this is still the case with the construction loan market, I guess your decision will be based on whether you need the equity from your old house to put into the construction loan.

Good luck!

Thanks for the response Periwinkle! The lot is plenty large enough (over 7 acres) that living in the old house won't affect where we build the new one. Part of what I was wondering I guess would be if the equity in the property could be used as part of the downpayment on the constructuion loan.

the equity of the property already will be used as downpayment of construction loan. This is because the construction loan will include the land as well as the "to be house". It will be appraised, wholly - land plus expected imrovements.

Not sure how this will work if you already have an existing home on the lot. Thinking the whole thing gets rolled in as equity on the construction loan unless you can split out the lot for the construction loan to exclude the part where the old home exists.

Also note that if you are building a 2nd home, you might require 2 utility connections, 2 septics, etc. Not sure if there are zoning issues for you regarding #units per lot and if you are allowed a 2nd home.

As far as earning interest on the $100k after selling your home. Interest rates today are pretty low. A 1 year CD is in the 1-1.5% range. So you won't make much money at all on interest at the current interest rates.

Thanks for the response sweet tea. I've checked out the zoning issues and it's doable. Once the new house is completed the old house would need to be demolished within a certain time period.

I guess it would depend on the appraised value of the land minus the existing home.

greenandwhite, When you get to the final stage, and depending on the age of the current house, don't simply tear it down and dump it in a landfill. There are loads of old house lovers that might love to buy it's parts in a salvage auction. We've furnished some of our existing old home with parts that were originally installed in other homes. We bought them at demo auctions. Could recoup some costs AND save some landfill space...

Thanks for the tip Patser! I'll certainly keep that in mind. Although I have my doubts. this place has been neglected, and even when it was new realy had no archetectural character whatsoever. If it did, I'd probably keep that stuff myself! I'm sure I can sell some of the materials for scrap.

Only thing that would concern me is having to live in the old place and discovering it wasn't do-able without expensive repairs that could take away from the budget for the new place.

Larke - We're going into this knowing we're going to have to put a few bucks into the old place to make it liveable. We'll definitely have a thorough inspection done so we know what we're getting into. It's that, or spend $1K/month renting while the house is being built and not being able to save as much money or build any additional equity into the property.

You really need to speak to a mortgage expert to determine what they can and can not do as far as the equity thing goes...