Can You Afford a Second Home?
Can You Afford a Second Home?
Some homeowners are lucky enough to wonder "Can I afford a second home?" Whether you are just curious or are in the early stages of considering buying a vacation home, let's go over how someone can afford a second home.
What will you use the second home for?
There are three major ways to use a second property. Depending on your intentions this can greatly change the financial picture you're painting with that purchase.
There are many purposes for a second home. Some people use it as a vacation home, while others use it as a place to live when they're not in their primary residence. It can also be used as an investment property, generating rental income or capital gains when it is sold. In addition, it's a good place to park your cash as real estate prices continue to rise.
Living in the second home
The most common reason for people to buy a home is to live in it. If your job or family situation demands that you be bi-coastal then buying a second home instead of relying on hotels or rentals can be worth it in the long run. The costs of keeping the house for personal use are going to be high between property taxes, an additional mortgage, and the home's maintenance.
With this use, you keep complete control over the home itself as a living space. It's the luxury of flexibility.
Renting the house out to others
If you are taking on a second mortgage then turning the home into a rental property can help you pay off the home costs while building home equity. After an existing mortgage is paid off then the vacation rental property, or just a rental property, is almost purely extra income. Though it may take some time to advertise the vacation property and set up systems to ensure a good stay, buying a second home is a great idea in the long term.
There are some risks, tenants not paying, damage to the property, and so on but they are minimal if you take the right precautions
Using the second property as an investment
While this only applies to the 1% of the 1%, some people buy second properties or third or sixth properties as ways to store cash. Given that real estate rises in value over time and makes for a relatively safe investment, the purchase price of a home is the price of purchasing an asset.
New York City's billionaire row is an example of using real estate as an investment property to its literal absolute height. These homes are not lived in or turned into rental properties - some may never have set foot in them. They are financial assets meant to be traded for large sums of money.
On a smaller scale, some people purchase a new property to turn liquid cash into less liquid, more secure assets; real estate. The home costs and second mortgages are things that they can cover without having to resort to renting the home.
What does buying a second home take?
Whether you want to buy a second residence or wish to get a headstart on your financial goals, one thing is inevitable and that's the cost.
Second mortgages and Home Equity Lines of Credit.
These are some dense personal finance topics and before making a decision or getting in touch with a realtor, it's important to understand just how much money you can afford to put down.
First, what is a home equity line of credit?
A home equity line of credit, or HELOC, is a type of loan that allows you to borrow against the equity in your home. This type of loan can be used for a variety of purposes, including remodelling your home, paying for college, or making a major purchase. In our case, it will be used to finance a second mortgage.
If you're considering using a HELOC to buy a second home, it's important to understand how this type of loan works. Here are a few things you should know:
· Your HELOC is attached to your primary mortgage. This means that if you fail to pay off your line of credit, it will affect your credit score and hurt your ability to take out loans in the future like a traditional mortgage or another home equity loan.
· You can only borrow up to 80% of the value of your home, but the amount you can borrow depends on the appraised value of your home. This means that you need to have built some home equity in your existing home, you do that by paying the mortgage payments of your primary residence on time. Paying your mortgage is essentially buying the value of your home back from the lender. You can then use that value as the line of credit.
· Your HELOC has a draw period and a repayment period. During this time, you can withdraw money from your line of credit. At the end of the draw period, you have to pay back all of the money that you borrowed plus interest. Depending on the lender, this period could last anywhere from ten years to as long as 30 years.
A second home mortgage will generally have a higher interest rate than the first mortgage used to buy the primary home.
In this scenario, your monthly income will take a significant hit if you go through with the home purchase. This second mortgage can be used for things other than home buying, like college tuition. Given the higher cost of the new mortgage, its requirements will also be different.
To qualify for a second mortgage, you will generally need a higher credit score and a lower debt-to-income ratio to prove that you can shoulder the costs. If you are self-employed, as a freelance writer, for example, proving your financial stability can be tricky.
Another thing to note is that the down payment for a second home that uses a second mortgage for financing will likely be higher. This is because the mortgage for principal residence needs to be paid off first in the event of a default. The increased risk means a larger down payment for the second home.
Another way to purchase second homes
Yes, you can buy a second home without taking out a second mortgage.
Using cash is the simplest way to buy a second home, but it's also the most expensive. If you have enough cash saved up, you can purchase a property outright. However, this option is only feasible for people who have a lot of money saved up.
Not only is using cash a great way to reduce your monthly costs, if you rent out the property you can bolster your monthly income and have enough equity in the home to take out a line of credit.
If you do not have an ongoing mortgage and own your home outright, then getting a new mortgage will be relatively easier than getting a second mortgage or your very first mortgage. As your principal residence can be used as collateral, the risk for a lender is lower making the overall cost of the mortgage lower as well.
Is owning a second home worth it?
Unless you buy a beachside property about to get swallowed by the rising sea levels or a property full of expensive defects, buying a home is almost always worth it.
Whether you're using the home to make the best of city life while having a place to relax in the countryside, renting the space for weekend getaways, or building a portfolio of investment properties - if you can afford it, having a second property is a good thing.
Given the amount of money involved, getting in touch with a realtor is a good idea. They can give you a rundown of what financing that vacation home or investment property looks like for your specific situation. Though it may sound easy at first, when you're calculating your debt-to-income ratio and figuring out whether the time is right for a mortgage based on things like the current interest rate and how much equity you have in your current home, you'll be glad to have a professional on your side.
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