When it comes to financing a second home, there are several options available to consider. Here are some of the most common avenues for financing a second home:
Conventional Mortgage
A conventional mortgage is a popular choice for financing a second home. It typically requires a higher down payment (typically 20%), and the interest rates may be slightly higher compared to primary residences. Lenders will also look at your debt-to-income ratio and credit score when determining eligibility.
Home Equity
If you have built up equity in your current home, you may consider using a home equity loan or a home equity line of credit (HELOC) to finance your second home. With a home equity loan, you receive a lump sum of money, while a HELOC acts as a revolving line of credit. The interest rates for these options are typically lower than other types of loans.
Time Limits to Consider
If you are considering financing the purchase of a second-home using cash or a home equity loan and then refinance at a later date with a regular mortgage, there are things to consider. If you have this strategy in mind, be aware of IRS provisions regarding a 90-day time limit on home acquisition debt when purchasing property and securing a mortgage against the principal for the first or second home. In order for the mortgage interest to be treated as deductible interest on home acquisition debt, the mortgage must be obtained within 90 days of the home purchase. The IRS regards home acquisition debt obtained more than 90 days after the home purchase as a home equity loan. Keep in mind that interest on a home equity loan secured by a primary home is not deductible for purchase of a second home. Buyers considering this strategy should consult with a tax expert to plan for maintaining mortgage interest deductibility.
Cash-Out Refinance
Another option is to do a cash-out refinance on your primary home. This involves replacing your existing mortgage with a new one that has a higher loan balance, allowing you to access the equity you've built up. The funds from the refinance can be used to purchase your second home.
Government-Backed Loans
Government-backed loans, such as those offered by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), may also be available for financing a second home. These loans often have more flexible eligibility requirements and lower down payment options. However, using a VA loan is not as straight forward as you might think. The U.S. Department of Veterans Affairs requires that when you apply for a VA loan guarantee, it must be for the residence that will be your primary home. In terms of timing, buying a second property with a VA loan really means that you are buying a primary residence, leaving your previous home as your “second home.” Let’s say that again: your old house is now your second house and your new house is the one you will live in, i.e. your primary house. This is completely legit, but you can see where timing is critical. If you plan on using your benefit for a second VA loan guarantee, you can’t buy a second home and not live in it. Be sure to discuss this option in more detail with your mortgage professional.
Portfolio Loans
Some banks and lenders offer portfolio loans specifically for second homes. These loans are held by the lender instead of being sold on the secondary mortgage market. They may have more lenient qualification criteria and offer unique terms and conditions.
Seller Financing
In some cases, the seller of the second home may be willing to provide financing directly to the buyer. This can be advantageous if you are unable to secure a traditional mortgage or prefer more flexible terms. However, seller financing is less common and may require negotiation.
Final Thoughts
It's essential to evaluate your financial situation, consider interest rates and terms, and compare different lenders to find the best financing option for your second home. Consulting with a mortgage professional can provide valuable insights and help you navigate the process of securing financing for your second home.
