6 things to know when buying your second home
If you’re thinking about purchasing a second home, you’ll want to consider a few things. (iStock)
Entering the real estate market for any buyer is a big step, let alone taking on a second property.
Getting a second mortgage can be a lot of financial pressure, but if you’re planning to make a move, current low mortgage rates could make it the perfect time to go for it. The first thing you should do is compare rates and mortgage lenders. Multi-lender site Credible provides daily featured rates so you can stay on top of the latest trends.
After you've compared rates and lenders, you can go through the following checklist to ensure you're making the best financial decisions before taking out a second mortgage.
What to know when buying your second home
If you’re considering a second home purchase, there are some unique considerations you should think about before moving forward.
1. You don’t have to pay off your first home to purchase a second property
You can take out a second mortgage even if you haven’t paid off your primary residence. If you can pay for your second property in cash, you’ll have no problems. However, if you need to take out a second mortgage, you’ll need to qualify for a new loan, and your lender will consider your current loan payments when deciding to offer you a loan.
You can explore mortgage options by visiting Credible to compare rates and lenders.
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2. Make sure you save more money for your second property
Owning a second home will cost you more money. In addition to monthly payments, you’ll need to consider a maintenance budget, taxes, and property insurance. Even if you can afford a second mortgage payment, don’t forget to factor in other expenses.
If you want to rent out the home, you may need to clean, make repairs, or repaint. If you plan to use the second property as a vacation home, you may need to set aside funds to furnish the house.
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3. Do you have enough to save for retirement and pay for both properties?
While you’re considering a second mortgage, make sure you’re setting aside enough money to fund your retirement. Can you continue funding your IRA or 401(k) plan and pay for a second mortgage? Pulling money away from your retirement investments could be risky, especially if you’re getting close to retirement age.
Maybe you're considering refinancing the mortgage on your first home loan. After all, it can lower your monthly payments, cut the life of your loan, and allow you to change your loan term — but you need to do your research. Visit Credible to see if you could save money with a refinance before taking any big steps.
Make sure to use an online mortgage calculator to determine potential monthly payments so you can make an educated decision.
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4. Remember that the real estate market fluctuates
While investing in real estate can be a profitable venture, the real estate market does fluctuate. Any number of uncontrollable factors (from pandemics like the coronavirus to political unrest and local ordinances) can affect the housing market.
Right now, the housing market has remained "strong" and mortgage rates are continuing to drop (though they fluctuate regularly). To take advantage of today's low rates, head to Credible to start your mortgage application process.
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5. Do you want to be a landlord?
Purchasing a second property as an investment can create a second revenue source, but it can be a lot of work. Do you want to manage tenants and field complaints or repair requests? Can you afford to hire a management company to handle any of the tasks? If you’re able to get reliable tenants, a second property could be an excellent investment. However, difficult tenants could make you second guess your purchase.
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How else can I take advantage of low-interest rates?
Interest rates are sitting at record lows, thanks to actions taken by the Federal Reserve in March 2020. These low rates could benefit homeowners considering a refinance or a second mortgage on their primary residence.
Here's where average interest rates stood at the time of publication:
- 30-year fixed-rate mortgage: 2.72%
- 15-year fixed-rate mortgage: 2.28% (down by almost a full percentage from last year)
With loan rates under 3%, now is a great time to take out a mortgage. With Credible, you can find the best mortgage rates and prequalify for a home loan within minutes.
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A second mortgage turns the equity you have in your property into money you can use for other expenses. A second mortgage uses your home as collateral, so you could risk losing your home if you’re unable to make payments. Second mortgages typically come in the form of a home equity loan or home equity line of credit.
Alternatively, you could also refinance your home loan to lower your interest rates and monthly payments. Whether you refinance your home or take out a home equity loan, you’ll be required to pay loan origination fees. You may also need to pay for a property value assessment.
New home refinances of more than $125,000 will also be subjected to an adverse market fee of 0.5% of the total loan. You can explore your mortgage refinance options by visiting Credible to get personalized rates without affecting your credit score.
To qualify for a second mortgage or a refinance, you’ll need a good credit score, equity in your home, and a low debt to income ratio. You should also use an online mortgage calculator to determine if the cost of a refinance or second mortgage is worth the effort.