Purchasing a second home can be a sound financial investment that has the potential to offer a prime spot for your future vacations, bring in long-term profits though the appreciation of your home, rental income and perhaps some tax breaks. If you’re in the market for a second home, there are many considerations to keep in mind, including location, potential maintenance and repair responsibilities, etc. However, before any of those factors come into play, it’s a good idea to think about and understand the process of financing a second home.
While many aspects of the home buying process remain the same whether you’re buying a primary residence or a second home, there are some additional considerations that are different when you’re financing a second home. Take a look at the following issues that you should keep in mind before you prepare to buy another residence.
Cash Up Front
If you already own a home, then you probably know that you’ll need to come to the table with enough cash to make your down payment and cover closing costs. However, for a second home, you’re likely to need more cash than you would to purchase a primary residence in the same price range.
While you can purchase a primary home with a 20% down payment or less, in many cases, lenders consider second homes to be riskier investments, so they require homeowners to put down more than 20% of the price as a down payment. If you don’t have this amount saved up just yet, you may need to wait a little longer to finance your second home.
However, some homeowners decide to use the equity in their first home to obtain enough money for the down payment on their second home. You can accomplish this by taking advantage of a cash-out refinance, an equity line of credit or a home equity loan.
In the same way that lenders will require a larger down payment because rental properties pose a higher risk, they’ll also lend at a higher interest rate than homeowners would otherwise qualify for if they were purchasing a primary residence. These higher interest rates, also known as non owner occupied mortgage rates, are often 1.5 to 2 points higher than owner occupied interest rates. Non owner occupied mortgage rates mean that homeowners will have to make higher monthly mortgage payments and contribute a larger sum of interest over the lifetime of the loan.
To save money, homeowners should aim to qualify for the lowest possible non owner occupied mortgage rates available. One way to do this is by making sure your credit score is as high as possible when you lock in a rate. Even though your credit score draws from years of your financial history, there may be certain steps you can take in the short term to boost your credit score in time to get a better rate.
Prepare in advance by scheduling a meeting with a mortgage professional or financial advisor who can let you know if there are any blemishes on your credit history that you can eliminate in the short-term.
The process of financing a second home can pose a unique set of challenges. However, if you’re prepared before you sit down at the table, you’ll have a better chance of closing on a solid investment.