Applying for a Second Home Mortgage - Here's What to Know
Buying your first home will bring you a lot of joy, but there are also challenges. However, once you are done with that, you may decide to get a second home. It can be an investment property or a vacation home. You'll have to go through the same approval process you were subjected to when purchasing the first home. However, it isn't a decision to be made lightly. Being a huge investment means mistakes can negatively affect your current finances. Therefore, you need to know the factors to keep in mind before applying for a second home mortgage. Some of the things to consider in this case are listed in the following paragraphs.
Consider your goals
There are advantages to owning a second home, including tax write-offs, but the purpose of the property also matters. The perks you will get if it is an investment property will be quite different from buying a vacation home. The differences will affect your finances in several ways, including the type of insurance coverage you will buy and even the taxes you will pay. Set your goals and research more on what you get with each option. Only then can you make an informed decision on getting a second home mortgage.
Run the numbers
If you still owe quite a bit for the first mortgage and your income cannot support a second home mortgage, you shouldn't go for this option. You'll still need a down payment for the second home, and your income should be able to support the monthly payments. A cash reserve or a stable income is necessary.
On the same note, there will be additional expenses with the purchase, including property-management fees, furnishings, property taxes, repairs, insurance, and even maintenance. Talk to a tax professional for a proper breakdown of the taxes you will pay once you get a second home mortgage. You may even be eligible for mortgage interest deductions.
Check out available mortgage options
If you pay a large down payment, you might qualify for a lower-interest loan. although, second home loans are typically at least 1% higher interest than a primary home loan. Vacation homes mortgage loans are usually conservative compared to primary residences. You need to keep your debt-to-income ratio below 36% as well. Talk to a professional loan officer to get a better understanding of how much it will cost to get a second home mortgage. Don't forget to get a preapproval before you start checking out the properties as well.
Can you afford a second home?
You don't buy a second home just because the next person has done the same. It's highly recommended that you are financially secure or plan on your second home as an investment property before you apply for another one. A mortgage calculator can give you the average amount you need for this purchase, including insurance, closing fees, and taxes.
Take your time when picking a payment plan
You can take a 15 or 30 years second home mortgage depending on the monthly payments you can afford. If you haven't retired yet, a 30-year second home mortgage is the better option since it won't greatly affect your monthly budget. However, the interest will be on the higher side. You may also have to refinance the first mortgage when you qualify for a second mortgage to reduce the monthly payments on the first home.
You also have the option to take out a home equity loan and use it to pay for the down payment on the second home mortgage. This brings down the mortgage amount for the second home. However, you won't be able to fall back on a home equity loan should an emergency requiring a huge amount of money comes up. Therefore, you should have an emergency fund.
Understand the tax implications for this purchase
Buying a rental property has better tax benefits compared to a vacation home. You can deduct insurance, taxes, and interest against the income you'll be generating from the property. In case you incur losses, you may as well deduct those against other income. Nevertheless, there is a cap on mortgage interest deductions. If your first mortgage is up to that amount, you can't deduct interest on the second home mortgage.
You are allowed to deduct depreciation from taxes. This comprises of allowance for any damage for more than 27.5 years. However, let a certified public accountant (CPA) or a qualified financial advisor guide you on this instead of relying on hearsay.
A proper understanding of the tax ramifications that come with a second home mortgage allows you to make an informed decision. After working hard to pay off your first mortgage, you don't want to mess up on the second one. Being informed allows you to make better decisions.
As much as this is a major financial decision, sound financial planning will make it easy for you. You don't have to hold back for fear of what might go wrong when many professionals can take you through the process to ensure you make an informed decision.