Financing a Second Home

Second homes are often the place for furniture you no longer need and dishes from your first apartment. A second class citizen of sorts. The same theory applies when trying to get a loan on a second home. Statistically if a borrower comes under tight financial strains they will keep current on the primary residence leaving the second home to fall into default. All is not lost; there are two main financing techniques to acquire a second home. Before jumping into the second home market take a strong look at your what your long term goals are, this will be an important part of the picture. For instance if this second home will eventually be a primary residence using a mortgage instrument that has lower payments may suite the situation better knowing that the loan may be refinanced or paid off when the other residence is sold.

The two paths to research for financing a second home are:

Traditional first mortgage: Borrowers have the same loan type options as would be available if the property being purchased was a primary residence. There will be decisions to be made based on mortgage fixed versus adjustable interest rates and interest-only versus self-amortizing loans. Second homes are considered more risky, therefore lenders charge higher interest rates and fees to compensate the lender for the added risk. Larger down payments are required as well. A second mortgage often add proportionately larger strain on family finances that a car or boat loan. The closing costs and other fees will be the same as they would be with a primary residence. Underwriters will scrutinize the borrowers’ financial standing to become comfortable with the borrowers willingness and ability to repay the loan.

Home equity loans: Home equity from a primary residence can be tapped for many things including purchasing a second home. A home equity loan will carry a higher rate and a shorter term (thus higher payment) but the costs to close the loan will be reduced. There are risks associated with this type of financing. Most home equity loans are floating rate based on a market index. If rates fluctuate up the interest rate charges can also go up. The end result may be the actual interest cost of an equity loan may end up higher that if you had taken out a conventional first mortgage on the second home. Recently banks have exercised clause in the loan documents that has seldom been used in if the equity in the primary residence has eroded to a point so low that causes the equity loan to be called and requiring new financing to be arranged.

Second homes can be a risk… look before you leap.

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