Some people looking to buy a second home for either their own leisure or to possibly resell in the future will look into mortgaging that home as well. Many wonder if this is even possible, can you pull out a new mortgage for another home? The answer is yes, you can. However, there are a few things to understand.
Second Homes and Mortgages
When getting any loan, including a mortgage, the lender will calculate your credit score and will also look at your debt. If you already have a mortgage on one home, keep in mind that every dollar owed on that mortgage counts towards you being in debt. This debt ratio weighs heavily in the lender’s calculations. What that means is, even if you can handle the payments of this mortgage perfectly fine, the interest rate will be considerably higher.
If the interest rate and payment plan is manageable and beneficial for your plans, then by all means look into getting that mortgage and the second home. It is difficult for most people to be able to do something like this due to the high costs of mortgages, but some people can definitely handle it.
Another possibility is to use the equity on your current home instead. If you own a good chunk of the equity on your current home, you should consider looking into a home equity loan or line of credit. These forms of loans against the home are essentially a 2nd mortgage on your first home and the interest rates are fairly low. This is a much advised option if you have ownership of a good amount of equity in your home.
Buying a second home and mortgaging it in addition to your first mortgage is definitely possible. But, especially in this case, it is extremely important to look into all options available since it gets trickier the second time around and the interest rates are bound to be higher. Still, over 30 percent of home purchases over the last three years have been second homes, so it can certainly be done.
By: Sergio Haros
Posts Tagged ‘Mortgages’
Which Is Better For Home Improvement – Refinancing Or A Second Mortgage?
December 7th, 2009
Finding the money you need to make those home improvements can lead to having to make some serious decisions. If you really want to make those home improvements, then you have basically two choices – either refinance a first mortgage, or get a second mortgage in order to get access to some of that equity.
While either choice could give you access to some cash for your project, only one choice will actually be better for you – depending on your circumstances. Here is what you need to know to make that decision.
You can get access to your cash by refinancing your first mortgage. If you find that you can get some better terms than what you already have, then this may be the way to go. Look for a lower interest rate that is about 1% or more lower than what you already have for a good deal.
Mortgage Insurance?
One thing that could help you decide would be if you are paying Private Mortgage Insurance, and now have more than 20% of the house’s value in equity. By refinancing, you could get access to your equity with a cash out mortgage, and drop your PMI at the same time. In order to drop the PMI, though, be sure that you do not refinance for more than 80% of the attained value of your home. This means that you need to leave 20% of your equity intact.
Get the security of fixed rates
Another possible reason to refinance might be to get away from an adjustable rate mortgage – if you have one. Many people are now seeing the danger of these mortgages. They are great when the financial times are good, but horrible enough to cost you your home when economic times go a little sour. By refinancing your first mortgage, and using your equity for your home improvement project, you can gain the financial stability you need.
Refinancing with either a first or a second mortgage could be not worth your time, though, if you are not planning on staying there very long. The costs of refinancing are significant, and will take the average person at least three to five years to start to see a positive return on their investment.
Options of Second Mortgage
A second mortgage will give you two options – either a home equity loan or a home equity line of credit (HELOC). Both of these will give you higher interest rates than on a first mortgage, and a second payment. Besides that, there are the same costs involved for the financing.
As a second mortgage, either one gives you the cash you need to beautify your home. Home improvements or repairs are tax deductible which means your actual rates are brought down some by the deduction. A HELOC will give you a greater flexibility since you draw out the money as needed (for a limited time), and only pay interest on the amount you use. So, if you are not sure you need the full amount of your equity, this method will save you some money, but be careful and be sure you understand how it will be amortized – and when.
Get the best mortgage deal
Refinancing or getting a second mortgage is a very common method of getting cash to fix up the home place. It also builds up the value in your home even more. Anytime you are thinking about either option, be sure to shop around getting several quotes, and then do a careful comparison of the fees (especially), as well as the interest rates.
The bottom line is that it depends on your own goals and financial situation as to which option may be better for you, but comparisons of quotes will let you know which option will best help you meet that goal.
By: Joseph Kenny