Ailing Economy's Lower Rates Provide Opportunity to Refinance

The way to think through the financials is to take a look at your baseline costs.

The house cost you about $250,000. If you spend $400,000 to tear down the house and build another one, which is $80 a foot for a 5,000-square-foot house, you will have spent $650,000.

If you can turn around and sell for $1 million, you will have a net profit of $350,000. As of today, you can sell for $500,000 and earn a net profit of about $250,000.

So, on the face of it, if you're right about the cost to build, you're better off tearing down your house and building a new one. But aside from the direct costs associated with your project, there are other expenses and costs that you're not taking into consideration.

First, you need to live somewhere in the year you're not living in your house. Add another $20,000 for that expense, and that's pretty modest.

Also, in terms of estimating the cost to build a luxury house, you may need to talk to some local home builders to determine construction costs. You may find that it will really cost you about $150 to $200 per square foot. A 4,000-square-foot house would cost you $800,000 to build.

Often, there are costs a homeowner fails to consider when estimating the costs of construction, including the architect's and contractor's fees, municipal permit fees, temporary fencing fees, disposal and hauling fees, and landscaping costs.

Once you have a detailed budget for your new home, you may have a better idea of what the tear-down and new house will cost, which will help you determine where you might end up financially after you build your dream home.

If you can afford the costs of building and you live in the neighborhood for 10 or even 20 years, you will enjoy the benefits of your new home. That has a value to it, and it may not be monetary. In the end, when you sell the home, it should be of a construction type and quality similar to homes in the neighborhood to reap the benefits of the newer, larger, more modern homes.

Builders have a general guide for tearing down in some neighborhoods: The land cost is about one-third of the final cost of the house. So if the land costs $400,000, the builder figures he needs to sell a house for $1.2 million. Typically, the profit is 10 to 15 percent, so the house would cost about $600,000. The builder also has to carry the cost of the land and hopes to sell the house quickly.

You can see how a builder could quickly get into trouble if he is carrying the cost of a $1 million house and it doesn't sell quickly. All profit would evaporate.

There may be another option -- can you gut-renovate the house and add to it? You may have some savings there. A renovated house will look and feel new, and in some communities it may maintain a lower real estate tax base.