A second home may be a good idea for personal reasons, such as a vacation destination, or to help round out an investment portfolio. Although second home buyers have been through the mortgage process at least once before, there are some differences in the way the loan is handled. Mortgage loan officers can guide you through the purchase of a second home and offer suggestions about ways to obtain the best financing.
Interest rate
Historically low interest rates are one reason you may be thinking about buying a second home. Still, second home purchases are viewed as riskier by mortgage lenders and thus are generally charged higher interest rates than a first home purchase. A larger down payment may help you bring the rate down, or you may opt to pay points upfront to reduce your rate.
Loan-to-value
Loan-to-value ratios are another important consideration of any second home purchase. Generally, acceptable LTVs for first homes are higher than second homes. This means that your down payment must represent a larger amount of the purchase price than it would for a first home purchase. For example, mortgage loan officers may allow your mortgage balance to reach as high as 80 percent of the purchase price of your first home. Thus, for a home worth $200,000, you can qualify for a mortgage as high as $160,000. For a second home with the same purchase price, the LTV requirement may fall to 75 percent, meaning that you must put down more money upfront and your mortgage can be no larger than $150,000.
Leverage existing equity
If you’ve paid down a large amount of your existing mortgage, or your home has significantly appreciated in value, you may consider using existing home equity to aid in your second home purchase. Often, home equity loans or lines of credit offer lower interest rates than a conventional mortgage, making them a good choice for financing on a second home. However, with a home equity loan or line you will be securing your second home with your first home, which puts your primary residence at risk should you run into difficulty making payments.
Payoff period
Payoff periods may also vary between first and second homes. When purchasing an investment property, you may be able to offset your additional mortgage payment with rental income and pay down the loan faster. Alternatively, if you plan on owning a vacation home for a long time, you may consider an extended payoff period with a lower payment. Mortgage loan officers will present payoff options and help you determine the appropriate amortization and monthly payment for your second home.
If you’re looking to make an investment in real estate and maximizing the opportunities available in today’s hot market, talk to a mortgage loan officer about financing options for an investment property or vacation home.
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