Have you been thinking of purchasing a second home? Many people dream of having a vacation home. Pop culture is obsessed with the concept, and often epitomizes having a second home as a sign of great wealth. The truth is, a second home is a more realistic target than people assume it to be.Verify my mortgage eligibility (Sep 30th, 2022)
Now, let's say that you've decided that you want a second home. After all, we did tell you that it's a lot easier than people think. You must be asking how the funding for this purchase will be acquired. Worry not! In this guide, we'll walk you through the many sources through which you can finance a second home.
What're My Options?
When it comes to securing funding for a second home, there are several avenues that you can investigate. Before we begin, it is important to note that the conditions that apply to financing a second home are more stringent than those for your first home. Several additional taxes and expenses apply to this purchase.
With that out of the way, let's take a look at the main ways through which you can acquire the money needed to buy your second home.Verify my mortgage eligibility (Sep 30th, 2022)
Equity refers to shares in an entity. When we speak of equity in terms of home ownership, we mean the share of the home that you currently own. Your mortgage requires a down payment from you, usually 20% of the borrowed amount. In terms of equity this means that you own 20% of your home and the lender owns the rest. Over the course of the mortgage, you reduce the lenders equity and increase your own.
Despite the fact that you don't own 100% of your home, lenders will give you cash against the equity you have in your home. This is referred to as home equity financing, and can be availed on very agreeable terms. On top of that, institutions are normally not very fussy about how you spend the borrowed money, and are fairly open to lending.
This type of financing is available in two forms:Verify my mortgage eligibility (Sep 30th, 2022)
Home Equity Loans
These are basically just like a mortgage. You offer up the equity you've already built up in your home as collateral and a lender provides you with cash up front. The payment structure is the same as a mortgage, that is, the total amount is split into a long-term payment structure of monthly payments at a fixed interest rate. For people who do not have the money to buy a second home at the moment, utilizing their home equity is a great way of getting it. You too can buy a second home, provided you can make the monthly payments on top of your existing mortgage comfortably.
Home Equity Line of Credit
Much like a credit card, HELOCs provide a line of credit for you to access whenever the need arises. These are generally used for down payments. HELOCs are not highly recommended though. This is because they have variable interest rates, meaning that your monthly payments can spiral out of control, throwing you in financial jeopardy.
More so with other kinds of debt, home equity financing requires careful deliberation on your part. A hint of conservatism is recommended since the slightest mistake could end up costing you the roof over your head. Adding salt to the wounds would be the realization that you lost a perfectly good home in the pursuit of a second one. So, always be careful with home equity loans - consider all your financial obligations and determine if you'll be able to manage another loan.Verify my mortgage eligibility (Sep 30th, 2022)
Another solid option is refinancing your mortgage. This simply means that you're restarting your mortgage, and taking out the difference as a lump sum payment. This is especially useful if interest rates are lower at the moment than they were at the time you originally secured it.
While you will now have enough cash to pay for your second home, you should keep in mind that you've essentially extended your current mortgage for the foreseeable future. This means that your monthly payments will be higher, and you'll have to cover closing costs. So, keep these things in mind when making a decision.
This option is only available to senior citizens, specifically those aged 62 and above. The reverse mortgage allows such individuals to safeguard their savings, and still be able to purchase a second home. If you meet this condition, then a reverse mortgage may be just the thing you need.Verify my mortgage eligibility (Sep 30th, 2022)
A reverse mortgage is a government-backed loan, and does not ask you for repayment until you decide to sell or move from your current residence. This is what makes it such an appealing option when seeking financing for a second home.
Such loans allow you to borrow against your own retirement fund. There is lower risk as compared to some other options, and the interest rate is non-existent. The way this works is that any interest payment is returned to your 401(k). The downside is that you'll have higher monthly payments, due to the short tenure, and you'll miss out on profits that your money would have made via interest, as part of the fund.