If your contingencies are up on Sunday, most likely you would send your release on Monday.

Celebrate the grit and struggle of dealing with ever impatient humans.  

The contractor would send me pictures of the work completed then I would release funds.

I would like to not release the EMD and use it for my damages/loss.

We've pretty much been ghosted and the seller refuses to sign a mutual release document and return the Earnest Money.

That equity is now buying you a property only three times what it is paying for.If you sold the property and got all that equity out, and reinvested it at the original 20% DP, that released equity would now be buying you $1M in PV. 

My answer is yes you would pay them off and then the private lender or HML will then make you a new loan.the only way this would work different is if you bought 3 properties at the same time and you had release clauses in each one for a partial pay off but regardless the lender your lender on the private or HML side is going to get a check and then have to turn around and lend it to you again. 

I have a very rare case, at the time of closing the seller decides not to close and cancel the sale, obviously he couldn't because we are under contract and I told him that we would take legal action to make the closing, to which he tells me "How much money would it take to get you, as the buyer, to sign a release of sale and cancelation document?".

At what stage should funds be released to the builder during the course of the build?

There is a good chance that 1940's flooring has asbestos in it and what you are doing will release dangerous particles.