5 Ways to Buy a Second Home If You Still Have a Mortgage on Your First

Sales of second homes are up 87% from April of 2020 – despite rising interest rates and declining inventory.

Economists have predicted that mortgage rates will continue to rise this year – possibly as high as 3.9%, so if you’re on the fence, now is the perfect time to buy. Does a vacation home match your travel lifestyle? How much can you afford? The good news is you have already gone through this process with your first home, and your past experiences can help you make better decisions.

If you’re interested in purchasing another home but are unsure how to make this a reality, here are five steps to get you started.

Step One: Pick a place and a property type

If you are going to take the plunge into investing in another home, you will first want to pick a region or specific city.

“When purchasing a second home, you first need to understand what your intention is for the use. For example, are you moving and using it as a primary residence and keeping the 1st home as a rental? Are you buying the 2nd home as an investment or vacation home? If you are buying the home as an investment or vacation home, you have fewer loan options available to you,” explained Nathan Mueller, Financial Planner and Coach at Blackbird Finance.

“Most likely, you will be using a conventional loan or possibly a construction loan. In either case, it is going to require a larger down payment between 20% – 25% because a non-primary residence is viewed as a riskier loan. However, if the second home is going to be your primary residence, then most lenders will let you put a lower down payment down on a conventional loan,” he continued.

Step Two: Consider all costs

The next question you must ask yourself is buying a second home worth all the expenses that come with it? To determine the answer, you should look at the whole picture. Of course, you have the mortgage to cover, but have you also counted any additional costs that come with a second home?

• Property tax: do you know how much taxes are in the area you are buying?
• Insurance: are there any homeowner’s association dues? Do you need to pay mortgage insurance, or can you put down 20% to avoid PMI? Will you need flood, wind, or any other insurance?
• Maintenance/decoration/furniture: will you need to renovate? Do you already have enough décor or furniture, or will you need to buy new for the new house? Will you need to pay a property management company?
• Utilities: are you prepared to pay double what you are currently paying for utilities? You will be splitting your time between the two places, but you are still incurring costs whether you are there or not.
• Cost of travel: is your second home close by? Or will you need to fly to use it? Make sure you budget travel expenses as part of the overall cost of using it.

Next, you’ll need to ask yourself if you’ll use the property enough to make the expenses worth it. With all the options available on Airbnb, VRBO, and other vacation rental sites, it might make more sense for you to rent a vacation place for a couple of weeks or months a year.

Step Three: Can you use your current house to pay towards your second home?

Did you know that you might be able to use your current house to fund your second home? According to the National Association of Realtors, the average home gained $50,000 in value last year. Higher value equals more equity, allowing you to better use your current home to finance your second one.

“You can get a cash-out loan and pull money out of the equity in your primary home to make it easier to afford the down payment,” said Blaine Thiederman, Founder and Principal Advisor of Progress Wealth Management. 

One of the perks of a cash-out refi is that you can borrow money at a lower interest rate than if you took out a new second mortgage loan.

However, Home Equity Loans and Home Equity Lines of Credit (HELOCs) use the equity you have in your home as a kind of collateral that allows you to take out a lump sum loan, or get a credit line to be used over time. HELOCs have variable rates and can be used for multiple different expenses. Both options allow you to go up to a slightly higher loan-to-value ratio than you could with the cash-out refi.

Step Four: Do you qualify? If so, secure a pre-approval letter.

This is the stage where you apply for pre-approval of a loan, and banks tell you how much money you can borrow. According to Fannie Mae, second home and investment properties have similar qualifications. Here are some of the significant factors.

• Banks want to see higher FICO scores for second homes than primary residences. Fannie Mae’s Desktop Underwriter will determine the minimum allowable credit score. Having a higher credit score helps approve the loan with fewer assets or reserves needed.
• Down payment for second homes is higher than for primary residences and depends on the occupancy type. The minimum Loan To Value (LTV) ratio for conventional loans is 10% for second homes and 15% for investment homes.
• Closing costs are a big factor to consider. While you may have enough equity in your home to do a cash-out or a home equity loan, you still need to pay closing costs. Closing costs vary based on state and need to be added to your calculations.
• Income and assets to support the purchase of another home is huge factor that lenders will evaluate. For example, do you have enough cash-on-hand or liquid assets to show that you can pay two mortgages?

Step Five: Research, research, research!

Buying a new home is exciting, but takes time, research, and thinking through your travel lifestyle now and in the future.

1. Can you commit to maintaining two places?
2. Are there any tax breaks for owning more than one home? This could be a big incentive as you weigh all the factors.
3. If you don’t already, will your current employer allow remote working in years to come?
4. Is it less expensive to stay in a hotel or Airbnb?
5. If you are purchasing an investment home, are you prepared to be a landlord and handle all that comes with it?
6. Think about your own travel lifestyle. Do you like to vacation in different places every year? Or do you find yourself returning to your favorite vacation destination time after time?
7. Is this something you really want, or are you getting wrapped up in keeping up with the Joneses mentality?

Stay Up to Date On Current Information and Rates

According to Fannie Mae, 2022 will bring changes to loan level pricing adjustments. Make sure you’re making decisions based on the most up-to-date information. Once you have taken the time to consider all parts of owning more than one home and are ready to take the plunge, make sure you shop around for the most competitive lender. Whether that be a mortgage lender, broker, or bank, don’t forget to comparison shop to ensure you get the best deal out there.

This article was produced and syndicated by Wealth of Geeks.