Home demolition or renovation: Which is best?

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Ask a Lender
November 20, 2017


Key Points

Demolition vs. renovation projects

  • If you have a mortgage, don’t demolish the home without explicit permission from your lender.
  • Your lender may connect you to construction financing if you wish to demolish the home.
  • Renovation projects don’t require lender approval but may be just as costly.
  • Compile a detailed renovation budget that includes contingency funds.
  • Look to a renovation loan or construction-to-permanent loan as a funding option.

Say you own an aging home that lacks modern features or requires extensive and costly repairs. You like the neighborhood where you live and don’t wish to move, but to love your home, major changes need to be made.

There are two main options for you: a major renovation project, or demolish the home and start from scratch with new construction.

Before you choose between a demolition or renovation project, you should do an extensive cost comparison and look into financing options. Importantly, if you have a mortgage, contact your lender before breaking out the wrecking ball.

Existing mortgage holders

If you don’t own your home outright, do not attempt to demolish the home without contacting your mortgage lender. Your loan agreement likely contains an acceleration clause that allows the lender to seek immediate and full repayment of the loan balance if you default. Tearing down the home is likely cause for default.

You can attempt to persuade the lender to allow demolition — make sure you obtain written permission — but more likely, you’ll have to pay off the mortgage first. Lenders aren’t likely to approve demolition if the loan balance is greater than the value of the land, as the land will be the only potential equity source if the home is gone.

If you explain your plans to the lender, they may be able to help you with construction financing. Having substantial equity in the property can serve as a valuable down payment on a construction loan, so homeowners with high mortgage balances prior to demolition may not qualify without another funding source. A lender will also look at the estimated after-repair value of the new home to determine if your existing equity is enough to support the costs of demolition, construction and permanent financing for a new mortgage. You may have to pay cash for some portion of the project.

Renovation projects should not be as complex. And there are multiple loan types to help homeowners pay for them, including the Federal Housing Administration’s 203(k) and Title I programs, as well as Fannie Mae’s HomeStyle Renovation Mortgage.

Comparing costs

Many factors can influence your choice to remodel or rebuild from the ground up. To start, you may consider the home’s physical condition, the possible setbacks of demolition, your desire to have an environmentally friendly or energy efficient home, and even the home’s historical significance.

The average cost to demolish a home in the U.S. is about $18,000. But the costs can vary greatly — from $4 to $15 per square foot —depending the location and size of the house. Larger homes that have basements and require removal of the entire foundation might cost $25,000 to demolish. Cost factors include structural additions to the property, such as a garage or deck; permits required by local law; the amount of debris to be cleared; and prevailing wages in the area.

In order to tear down a home, you’ll also have shut off all the utilities and hire a contractor to remove or reroute pipes, wires and other infrastructure. You’ll likely need an architect to design your new home and that can cost around $5,000 on average. If you have an older home, you may need to deal with asbestos removal, and that can add hundreds of dollars per hour to your total bill.

The demolition costs are just a fraction of what it’ll take to construct a new home. Construction can cost 10 times as much and comprise 90 percent or more of your total budget. The home’s size and location, the building materials and site-preparation work all influence the building costs.

A major renovation project that, for example, includes fixes to the foundation, roof and plumbing, as well as interior work on a kitchen, bathroom and other living spaces, can cost $100,000 or more. And there may be unexpected costs that drive up the price tag, once a contractor digs into the guts of the home. This may include mold, leaky pipes, infested wood or damaged wiring.

Hire an inspector prior to making a decision to renovate or demolish. In either case, add a contingency reserve to deal with budget overruns. If the home is in poor physical condition, demolishing may the wiser course, but if an inspector determines it is structurally sound, a renovation usually has less-expensive upfront costs.

Funding options

As previously mentioned, if you choose the renovation route, there are specific loan programs to help. The FHA 203(k) loan, for example, allows you to gut the home as long as you keep the existing foundation in place. There is a maximum loan amount ranging from $271,050 to $721,050, based on the cost of living in your area.

Construction-to-permanent financing is a popular option when building a home from the ground up. Many lenders offer construction financing with a term of 12 months or less that can be rolled into a traditional mortgage of up to 30 years. If you’ve paid off the existing mortgage prior to demolition, it can be easier to obtain a construction loan as your equity can provide a down payment. The lender will base your loan amount on the appraised value of the completed project.

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