The man literally got permits to add onto each side of the cabin. He then tore down the cabin from the middle and built the rest of the house he wanted in the location he wanted. I am sure it cost a lot more than just a tear down and build would have. But he wanted the location for his new house. To live within the legal requirements he had to do it that way.
I really do not know where a lender would call that line. Be smart, ask a lender before doing anything. The man in the example above asked the town office about replacing the cabin before he tore it down. He found out he could expand it by a certain percentage. Being smart he followed the rules and ended up with what he wanted.
You will also need to follow the rules. That means asking those who give them out. In your case it would be the lender. It may end up as a non-issue as you also get a construction loan for new construction on top of the old loan. But you must get all the information you need before taking the first step. Otherwise all of your steps could be leading you down the wrong path.
since I don't plan to do this rebuild for at least 3 years (to avoid gains tax when selling), say the land itself becomes worth as much as the price I paid for home, wouldn't that constitute the collateral needed for the bank? the only hiccup I see there is the bank has more difficulty selling a piece of land rather than a home on land despite the fact the value of the land is equal or exceeds what I owe them.
then my follow up question would be, is there a line they draw that marks rebuilding a home and remodeling? Perhaps if part of the older home was kept to build a new home, then this could wrok?
Otherwise, I'm guessing if a construction loan were needed, the remaining home/land mortage would need to roll into that construction loan.
Since you are financing house and land you can not remove the house. If you bought it as land only with house to be conveyed at no value it might work.