 Dear Dr. Don,
We purchased a 1920s home (900 square feet) in Missouri with 145 acres back in 2003 for $180,000. We are in the process of putting up a pole barn with living quarters (3,000 square feet, with heat and a concrete floor) on the property. It's not too far from the current home that we will eventually tear down to build our dream home.
The pole barn is mortgage-free, as we didn't have to borrow any money to construct it. I am running into an issue of canceling the insurance on my current home and I cannot tear it down due to having a mortgage payment -- it has to be insured for $150,000.
What is my best solution to resolve this issue? I would only like to insure my pole barn/living quarters. Can I refinance somehow -- for the land only (the going rate is around $2,000 per acre) or just refinance my pole barn with land and pay my existing loan off?
Please help as I don't know how to approach this issue with a loan specialist. I was told by one loan specialist that if there are two "homes" on the property, I would not be able to get a loan and that most lenders would not finance a pole barn even though it has living quarters.
-- MS in Mo.
 Dear MS,
I'd guess you took out a mortgage on the property originally because you couldn't find a lender to loan you what you needed to buy the land without considering the value of the house to the property. The lender requires insurance on the home to protect its interest in the property. Pay off the note, and your insurance problems are gone.
Insuring the pole barn shouldn't be an issue. Work with your insurance agent to determine the coverage you need for the structure.
You should be working with a mortgage broker on refinancing the land. Mortgage brokers provide a real service when you have a "story loan," meaning you have to sell the lender on the story behind the loan. The broker can work with different lenders to find a lender that's willing to refinance to meet your needs.
If the land is worth $290,000 as unimproved acreage, there should be enough flexibility in structuring the refinancing based on the land's value alone.
As you get closer to building your dream home, you can look into a tear-down construction loan. This type of loan differs from a construction loan in that it also finances the demolition, debris removal and cleanup of the existing structure. This approach would also consider the value you're adding to the property in the new home.
You didn't provide the particulars on the initial appraisal, when you plan to build the home or the terms of the existing loan. But trying to finesse the issue of homeowners insurance on the existing structure by refinancing the land could be a penny-wise, pound-foolish approach to your long-term plans for the land.
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