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

Second-home sales are up 87% over April 2020, despite increasing interest rates and a decrease in stock.

Experts predict the mortgage rate will increase this year, perhaps up to 3.9 percent. If you’re unsure, this is the ideal moment to invest in. Is a holiday property fit your lifestyle of travel? How much money can you spend? The good thing is that you have been through this procedure with your first house, and your experience will assist you in making better choices.

If you’re considering buying another house but aren’t sure what to do to make it happen, here are five ways to help get you going.

Step One: Select the location and property type

If you’re planning to consider purchasing a home in the future, it is essential to select a region or a specific city.

“When buying a second house first, it is essential to determine what the purpose is for its use. For instance, are you moving to use it as your primary residence and using the primary home for rental? Do you intend to purchase the second home as an investment property or a vacation home? Suppose you’re purchasing the property as an investment or vacation property. In that case, you will have limited loan options for you.” said Nathan Mueller, a Financial Planner, and Coach at Blackbird Finance.

“Most likely, you’ll have to take out a conventional loan, or perhaps construction loans. In any case, you are likely to require a higher down payment of between 20% and 25% since a residence that is not primary is considered to be a riskier loan. If the second property is your main residence, lenders will likely allow a lower down payment on a conventional loan.” He continued.

Step Two: Think about the cost of everything.

The second question to ask yourself is, is purchasing an additional home worth the cost of all the expenses that go with it? It is best to examine the whole image. Of course, there is an obligation to pay; however, have you thought about any other costs associated with a second residence?

  • Property tax: Do you know what taxes are in the region you’re buying?
  • Insurance: Are there any homeowners’ association fees? Do you have to cover mortgage insurance, or could you pay 20% of the amount to get rid of PMI? Are you in need of flood wind, flood, or another type of insurance?
  • Maintenance/decoration/furniture: will you need to renovate? Do you have enough tables or décor, or do you have to purchase new furniture for your new home? Do you have to be paying a property management company?
  • Utilities: Are you ready to pay twice what you currently pay for utility bills? You’ll split your time between these two locations, yet you’re still paying the same amount regardless of whether you’re there.
  • The cost of traveling: Is your second home nearby? If not, do you need to fly to access it? Be sure to budget the cost of travel as part of the total expense of using it.

In the next step, consider whether you’ll use the house in a way that makes the cost worth it. With all the options via Airbnb, VRBO, and other rental websites, It might be more sense to rent a place for vacation for a few months or weeks a year.

Step Three: Can you use your home as payment for your second house?

Did you know you could be in a position to make use of your home to help finance your new home? According to the National Association of Realtors, the average home increased by $50,000. A higher value equals more equity, which allows you to make the most of your current house to fund a second one.

“You could apply for cash-out loans and take cash from the equity of your primary residence to help you finance the down amount,” said Blaine Thiederman, the founder and principal advisor at Progress Wealth Management.

One benefit of refinancing a cash-out is that you can take out money at much lower interest rates than when you were to take out a second mortgage.

In contrast, Home Equity Loans and Home Equity Lines of Credit (HELOCs) make use of the equity in your home to serve as collateral, which allows you to avail of an amount in one lump sum or obtain credit lines that can be used throughout. HELOCs are a variable rate and can be used for various expenses. Both options let you increase an even higher loan-to-value ratio than you can with cash-out refinancing.

Step Four: Do you qualify? If yes, get an approval letter.

When you request pre-approval for the loan, banks inform you of the amount you can get. Based on Fannie Mae, second homes and investment properties are the exact requirements. Here are a few essential factors.

  • Banks would like to see more FICO scores for secondary homes than primary residences. A Fannie Mae Desktop Underwriter will determine the minimum acceptable credit score. A more excellent credit score can help get the loan approved with fewer assets or reserves required.
  • The down payment on second homes is more than primary residences and is contingent on the type of occupancy. The minimum Loan to Value (LTV) rate for loans with conventional terms is 10 10% for second homes and 15% for investment properties.
  • The cost of closing is a significant element to think about. Even if you have enough equity in your house to get a cash-out or an equity home loan, you’ll have to cover closing costs. Costs for closing vary according to the state in which you live and should be factored into your calculation.
  • Assets and income to fund the purchase of a new house are essential factors lenders will consider. For instance, do you have enough cash or liquid assets to prove that you can afford two mortgages?

Step Five Step Five: Research”, research, the research!

A new home purchase is a wonderful experience, but it requires time, effort, and planning your lifestyle for travel now and in the future.

  1. Are you able to commit to maintaining two locations?
  2. Are there tax advantages that apply to owning multiple homes? This could be a considerable incentive if you consider all of the elements.
  3. If you do not already have it, will your current employer allow remote working in the coming years?
  4. Are there savings if you stay in a hotel or an Airbnb?
  5. If you’re buying an investment property, do you have the skills to become a landlord and take care of everything that comes with it?
  6. Consider your traveling habits. Do you love to travel throughout the year to various locations? Do you frequently return to your preferred vacation spot every year?
  7. Do you really would like to do it, or are you too caught trying to keep on with Joneses’ mindset?

Keep up to date with Recent Information and Rates.

As per Fannie Mae, 2022 will be the year that loan levels will undergo pricing adjustments. Make sure that you’re making decisions based on the most current information available. When you’ve spent the time to think about the various aspects of owning multiple homes and are now ready to go for it, ensure that you search to find the most affordable lender. It doesn’t matter if it’s an agent, mortgage lender, or bank, be sure to do comparison shopping to ensure that you find the best price available.