Do you already own a house and are you thinking of buying another? These are the benefits of buying a vacation home or a second home. But before you make a decision, do the following:
Think about your goals
Perhaps you want a vacation home that you can visit on weekends, holidays, or during the summer. Or maybe you want to live in that house when you retire, or leave it to your children. Owning a second home can offer advantages, like tax deductions, depending on how you use it. But a second vacation home is very different from buying an investment property to generate income. That difference can affect your finances, including the taxes you must pay on the property and the type of insurance coverage you need.
Check the numbers
First things first, consider whether you have the down payment you need and whether you can comfortably afford a second mortgage. Do you have a stable income and a cash reserve? Think about the additional expenses that come with owning a second home, such as property taxes, insurance, maintenance, repairs, furniture, and property management fees. The tax implications of a second home largely depend on the type of property you buy and how you use it. Talk to a tax professional to learn how buying a second home can affect your taxes, as you may qualify for home loan interest deductions. Learn more about preparing your finances and the other stages of the home buying process.
Know your mortgage options
You may be able to get a lower interest rate on your loan if you make a large down payment, since you’ll be borrowing a smaller percentage of the property’s value. (This is the loan-to-value ratio.) Loans available for vacation homes tend to be more conservative than those for primary residences, and you may need to put down a down payment of 20 percent or more, especially if you need a large mortgage loan. (Bank of America offers large-dollar mortgage loans.)
Lenders also generally want your debt (including a possible new mortgage) to be no more than 36 percent of your monthly income before taxes. This percentage is your debt-to-income ratio.
A professional loan officer can help you better understand the costs of buying a second home and the loan options available. You may also be pre-qualified or pre-approved for a loan before you start looking for properties.
Your lender will look at your current financial situation and the property you want to buy, and advise you on your eligibility for different types of loans. If you’re a Bank of America customer, you may qualify for a reduction in your mortgage down payment through the Preferred Rewards Program.
Buying a second home can be complicated and take some time, but with forethought, preparation, and a little help from experts, you can make an informed decision that’s right for your situation.
How to apply for a second mortgage for the same home
If your second loan involves mortgaging a house on which a loan still weighs -your habitual residence, for example-, to everything we have told you before, you must add two additional conditions:
- The banks are going to require you to have paid off a good part of the debt, which means at least half of the borrowed capital in the first operation. In order to negotiate a second mortgage loan, the value of the two properties you want to buy is also important. The higher the value of the asset you are mortgaging (your habitual residence) and the lower the value of the asset you want to buy (a parking space), the more likely you are to be granted the money.
- The financial entity will add the two loans (the debt you accumulate with both) and will not lend you the capital if you exceed 75% of the appraised value of the home you mortgage. That is why it is very important that the home has a very high appraised value and that the first mortgage accumulates a very low level of debt. Come on, you have very little left to pay.
Alternatives to requesting a second mortgage
Do not forget that there are other ways to get financing:
- The first would be to carry out a mortgage extension, which would be very similar to applying for a second mortgage on the same home.
- The other would be to find another financial institution that is willing to make a mortgage subrogation. That is, keeps your mortgage negotiating with you a revision of the borrowed capital so that you can cover the new acquisition.
As you have seen, a second mortgage can be made against a home that you already have mortgaged, but almost paid off, or against a second property that you want to buy.
Although it depends on the personal circumstances of each one, in many cases the second option is more recommended so as not to endanger your first home. However, everything happens by negotiating well with the financial institution and assessing the different financing options that they offer you.
