Conditions:
- Rates as low as 3.25%
- Prime Rate as of 3/16/2020 = 3.25% (Wall Street Journal).
- No application or closing costs.
Best Ways to Finance a Second Home
- Home Equity Financing. Home equity products are one of the most popular ways to finance a second home because they allow access to large amounts of cash at relatively low interest rates.
- Reverse Mortgage.
- Cash-Out Refinance.
- Loan Assumption.
- 401(k) Loan.
To be considered a second home, it must be some distance from your primary residence, although this requirement may vary by lender. Since there's little reason to own a vacation property that's near your primary residence, many lenders insist that a second home be at least 50 miles from your first home.
You can use a portion of your savings to buy a second home, or you can invest the same money in an investment property and rent your home. If you buy, you will incur the costs of ownership and you will also benefit from any appreciation in the home's value.
A second home is a residence that you intend to occupy for part of the year in addition to a primary residence. Often, to qualify for a second-home loan, the property must be located in a resort or vacation area—like the mountains or near the ocean—or a certain distance from the borrower's primary residence.
Down payment for a second homeIf you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least 20% down for a second home. A down payment of 25% or higher can make it easier to qualify for a conventional loan.
The maximum debt-to-income ratio to buy a second home is 45%. With this DTI, you'll likely need compensating factors such as more months of cash reserves, a larger down payment, or a higher credit score to purchase a second home.
Buying a vacation home is a major financial decision. You could save money in the long run if you vacation often. If you spend two months each summer at the beach, your annual mortgage payments on a vacation home could be comparable to what you pay to rent for two months.
Expect to put down at least 10% on a vacation home (compared to a 5% minimum, or even no down payment, for a primary residence). You may want to put down 20% or more, if you can, to avoid paying private mortgage insurance (PMI), which usually runs between 1/2 and 1% of the loan amount on an annual basis.
While second or vacation homes require a 10% minimum down payment, you must put down at least 15% when buying an investment property. In some instances, the down payment requirement can increase for both property types if your credit score is lower or debt-to-income (DTI) ratio is higher.
Lenders and loan officers confirm that they regularly encounter falsehoods about occupancy. Fibbing about occupancy plans has long been a temptation for small investors who buy and fix up single-family homes for rental and for second-home buyers who plan to rent out their properties for part of the year.
Things to Know Before Buying a Vacation Home
- 1) Have a budget and know what you can afford.
- 2) Know where you want to be.
- 3) Getting there.
- 4) Make sure the type of vacation home fits your lifestyle.
- 5) Plan to relax.
- 6) Don't assume you can rent out your vacation home.
- 7) Be realistic about rental income.
- 8) Protect your investment.
Second mortgages allow you to use equity without altering the terms of your original mortgage. However, they also add another payment to your monthly budget and often have higher interest rates. Refinancing allows you to access equity without adding another monthly payment.
Closing costs for second mortgages can be as much as 3% to 6% of your loan balance. And if you need a second mortgage to pay off existing debt, that extra loan could hurt your credit score and you could be stuck making payments to your lenders for years.
Consult a mortgage lender and get a pre-approval, not just a pre-qualification. Bear in mind that you may need a large down payment in order to qualify for a second home mortgage. Some lenders ask for a down payment of 20 percent but others can go as high as 32 percent, depending on the property.
USDA and VA home loans allow borrowers to buy homes with no down payment. There is one catch: borrowers looking to finance their second home with a USDA loan must use the home as a primary residence rather than an investment property or vacation home.
For people struggling with consumer debt, taking out a second mortgage to pay off credit cards can mean lower payments at a lesser interest rate. However, that strategy is not a good idea unless you first change the behavior that caused the debt in the first place.
The best second mortgage rates of 2020
| Provider | Loan Types | HELOC Terms |
|---|
| Alliant Credit Union | HELOC | 15 to 30 years |
| Bank of America | HELOC can convert to HEL | 10 years |
| PenFed | HELOC | 5 to 20 years |
| Citi | HEL and HELOC | 10 year draw period |
A second mortgage is another loan taken against a property that is already mortgaged. A second loan, or mortgage, against your house will either be a home equity loan, which is a lump-sum loan with a fixed term and rate, or a HELOC, which features variable rates and continuing access to funds.
Buying a second home is definitely easier than buying the first because you already know most of what's involved.
If you're purchasing your second home before you retire, a strong case can be made for the 30-year payment plan so there is less of a dent in your budget every month. However, you'll pay more in interest with a 30-year mortgage than a 15-year mortgage.
