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3 Things You Need to Know about Second Home Financing

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Building a house of your dreams is something you want to accomplish in your life by the time you retire. One needs to do proper financial planning and work hard for years to save money while also supporting his family, to go for buying a second home. Keeping in mind all the aspects before deciding on buying another house is very important.So, before taking a step towards buying a second home one should examine and consider both the pros and cons, i.e., all the benefits and the inconvenience he/she would face after taking any such decision.

There are a few factors one should consider before buying a second home. Which are:

1) Can you afford a second home?

The first thought you should put forward is that if you can financially afford to buy a second home. Here are a few necessary points you need to check off first -

   • You need to make sure that you have fully paid off your debt for your first home and have enough money to go for buying a second one. If your repayment for the first home loan is still incomplete, then you should carefully plan your home loan payments and after that consider going for a second house since the second mortgage interest rate might be higher than the interest rate of your first mortgage.

   • Your bank will have to be convinced by you that you can pay for both the home loans together with your current income and also live a comfortable life alongside.

   • You should consider using a mortgage calculator first, which might help you have a clear picture of your interest rates on your home loan, including all crucial factors like tax, fees, insurance, etc. The down payment for the second mortgage may run from 10 percent to more than 20 percent.

  • You should also plan whether your first mortgage will be a vacation home or rental property. You might want to rent your old home or keep both the houses as your residences.

   • The interest rate on a second mortgage will become tax-deductible if you keep it as a personal residence along with your first home. But, if you keep your first home for rent and are earning money from it for 14 or more days in a year, you won't be able to get the benefit of getting all the mortgage interest deducted on the second home.

You should know that renting a house comes with more responsibilities, along with just following the local landlord laws. You might have to look into the problems such as water leak or load shedding even at 3 am if faced by people at your house given at rent. And it also means spending more money. Since the house is yours, you will have to look after solving the problems and maintenance of the house from time to time, whenever required. Even if you have a good management company hired to take care of all these issues, it will still take up on your earnings regularly in any way. So, you might need to seek guidance under a financial advisor to know how to peacefully solve these problems with less expenditure if you rent your house.

2) Finding the right real estate agent to guide you through:

With previously pending repayment of home loan for your first mortgage, buying a second home and going for a second home loan might be difficult and not the right choice. Here's how a real estate agent might guide you -

   • The right real estate agent can help you calculate all the expenses and give you an estimate to plan your repayments of both the home loans.

   • Getting a home loan with a low credit score is difficult, and for second mortgages, one needs to have a credit score of 725 to 750. You can use a closing costs calculator to know your debt to income ratio before opting for a second mortgage.

   • A real estate agent will also help you in finding out a house with good locality, safe neighborhood, correct market prices, right home loan scheme, and other important factors one needs to look for before buying a new house.

3) Your payment plan- keeping all aspects in mind:

You can clear the debts on the second mortgage within 15 to 30 years. Under these two choices, the scenarios you should look into are -

   • If you choose to go for a 15-year term on your mortgage, you need to make higher monthly payments, than in a 30-year term plan.

   • If you go for a second home before you retire, you can choose the 30-year term so that you can save enough money in your budget per month, living a comfortable and stress-free life. But, one should keep in mind that in a 30-year mortgage term, you will have to pay a higher interest rate for your home loan than in the 15-year term plan.

   • The down payment to your second home might be higher than what you had to pay in the first one. So, you should adequately plan the mortgage payments keeping in mind that in the end, the second home will be your dream house come true. The second home will be the result of your hard work all these years, and you should not compromise for less than what you can afford.

You also have many advantages if you are investing in a rental property.

   • The income which you will be earning from the rented property can be used to deduct interest, insurance, taxes, and other payments.

   • Buying a second home is something that should be thoroughly thought through, and all aspects should be examined before making any decision for it. You should have proper financial planning and see that you can afford a second home or not keeping in mind your income and pending debts. You should look into all the aspects, including taxes, interest rates, property rates, location, etc. before making any decision.

   • You also need to have a well-maintained credit score or credit history so that you can unlock benefits that can lessen your interest rates and debt stress on your home loan.

You should consider consulting a financial advisor or agent while making any such final financial decision. A financial advisor will look through all the factors, read your profile, your credit history, affordability, your previously taken home loan, property rates, and then advise you for the correct decision.

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