A defining moment for a hard-working individual arrives when you’ve decided to purchase a second home. It may be seeking out an investment property to diversify your portfolio or it could simply be a vacation home in a subtropical destination. Fewer than 5% of Americans achieve this dream, and if you’re in the position to do so, there are a few key items to consider.
A second home has additional expenses and hurdles to mortgage approval. It requires careful planning but it’s certainly achievable if you lay it out correctly. Here are three tips that can put you in a great position to secure a home mortgage for a second home.
Budget for the additional expenses
Even if you split your time perfectly between your primary residence and second home, added expenses for both properties will exist. Caring for two homes will require some help, and hiring a property management firm to look after your second home is often a smart move – but it comes at an expense.
You’ll need to account for repairs and maintenance for two homes instead of one, and property taxes are likely to be higher as you may not qualify for incentives or credits on the second home. The same goes for income tax deductions for mortgage interest.
That isn’t to say that a second home isn’t a good idea. Rather, be aware of the additional expenses so you don’t overextend your finances.
Leverage your equity from your primary home
Unlike a primary residence, a second home doesn’t typically have criteria that are as easy to qualify for. As an example, loan options are commonly at a lower loan-to-value ratio, requiring that you make a higher down payment. In the event you can finance at a high LTV ratio, private mortgage insurance can put the payments out of reach.
A strategic move that can make a second home affordable is to leverage the equity you have in your home. But securing a cash-out refinance while keeping your LTV ratio below 80%, you can access equity for a down payment to avoid needing PMI on either property.
Establish a revenue stream
The intention may be to rent the property long-term for consistent rental income. But if you’re purchasing a second home as a vacation home, why not rent it out short term while you aren’t using it? The added income stream as a rental property is likely to offset much of the expenses you incur throughout the year. It should be able to cover your mortgage payments, at minimum.
Of course, other important aspects to purchase a second home include keeping credit card debt under control and protecting your credit score. With relatively low mortgage rates, now is a great time to be talking with your real estate agent to find a second home, before the rates go up.
If you need financing for a second home, we’re here for you. MBANC simplifies the mortgage process with fast, expert servicing for self-employed borrowers, investors, and high-net-worth purchasers.