Financing Options for Your Second Home

Wouldn’t it be nice to have huge amounts of money set aside for a second home purchase? Paying cash for a condo on the beach, or a lodge in the mountains would be a great feeling, but unfortunately, most people don’t have huge cash reserves just lying around waiting to be spent. If you can’t purchase your second home outright, you’re going to have to look for mortgage options. Here are some tips on how to find financing for your second home.

Shop Around for Second Home Financing Options

When you look for financing options, don’t sign up for the first offer that you come across. Shop around and gather quotes from different lenders. Finding financing for a second home is a bit more challenging than locating financing for the purchase of a primary residence. Lenders know that second homebuyers have stretched finances. Be prepared to pay slightly higher percentages and points on a loan for a second home. You may also be required to make a larger down payment on a second home purchase. Due to the additional costs involved in securing second home financing, you need to shop around and make sure that you’re getting the best deal.

Do Want a Vacation Home or an Investment Property?

How do you plan to use your second home? Will it be a cozy vacation getaway that you won’t be visiting that frequently? Do you plan to rent the place out? If you want to collect rent on your second home, mortgage companies will consider your second home to be an investment property. Additional points and percentages will be tacked on to your loan agreement. You will also have to make a down payment of at least 20 percent. As long as you understand that financing options are different for vacation homes and property investments (like rentals), you won’t be surprised when it comes time to find a mortgage.

Do You Have a Long Term or Short Term Plan?

If you plan to own your second home for a long period, go with a traditional 30-year fixed mortgage. Your payments will stay the same throughout the life of your loan. If you plan to sell your second home within a few years, consider an adjustable rate mortgage (ARM). These types of loans feature a low initial interest rate. If you think that you’re going to get rid of the property relatively soon and upgrade to something else, then you can save a lot of money on the first years of your mortgage by taking advantage of the low introductory rates of an ARM.

Buying a second home will allow you to build additional equity. If you hang on to a second home, you can rent the place out, improve your cash flow and build up a solid retirement nest egg. Make sure you have enough capital reserves before you make a second home purchase. Before you settle on a location, make sure you think through your decision very carefully.