This is an important question and one that should be thought through thoroughly. Ultimately you will need to decide how to best proceed based on your circumstances and your comfort level with risk.
There are two alternatives to consider when you purchase a new home and currently own a home:
1. Selling your present home before starting construction on the new home
Selling your current home before building a home allows you to know exactly the amount of money you will have to put down on the new home. But unless the buyer allows you to remain in your present home, it most likely will require finding temporary living quarters and moving furniture twice.
Ideally the buyer would wait to settle on your current home until the new home is finished but typically a buyer will want to purchase and move in before the normal construction time to build a new home.
The buyer may also consider purchasing your current home but allow you to remain in the home and pay rent until you can move into the new home. Another option is to sell your present home and rent a home or apartment until you can take possession of the new home.
This means finding a short-term rental but you would not have the uncertainties of starting construction on a new home before the buyer has secured financing and met all contingencies.
2. Starting construction on the new home before selling your present home
Starting construction of the new home before selling your present home typically makes things easier with one move from your present home into the new home. There is risk not knowing the exact amount of your sale proceeds and it can be a financial burden if your current home does not sell in the expected time frame.
With a construction loan, you only pay interest on the amount of the mortgage as it is advanced to cover the various stages of construction so you are not making a full payment until the end of construction.
Some lenders offer a blanket mortgage on both your present home and the new home to be built. Once the current home sells, the amount of the mortgage is reduced by the sale proceeds. It does require qualifying for the loan amount on both properties.
Home Equity Line of Credit When Building a New Home
A home equity line of credit may be another option. These can typically be interest-only for 1-2 years with a maximum loan amount of 85% of the value of your current home.
My wife and I used a line of credit to purchase our lot before selling our home. Then we did the Purchase Agreement and began to obtain permits for building our home.
We then waited until we had a sales agreement on our current home to begin construction on our new home. Since we had closed on the land and had permits, we were able to start promptly once we found a buyer.
We recommend discussing this with a Housing Consultant and contacting a lender for more details to determine how you may want to proceed.