Once you have created a life for yourself and made sure your family members are comfortable, the next thing that comes into your mind is to buy a dream vacation home. So then you need to approach a bank or an individual lender and apply for a mortgage for your second home. Some such lenders might even contact you directly via mortgage leads. It is up to you whether you want to go with them or shop around. However there are a couple of things you need to know before you actually buy that second home.
You will have to pay higher interest rates
The mortgage on your second home will have a higher interest rate than that of your initial mortgage. The difference could be anywhere between a quarter of a point to half a point. You will also need to prove that you are in a position to make your monthly mortgage payments from the money that is spared after making the monthly payments of your first mortgage.
Things are not as easy as they were before in the mortgage industry. Today’s lenders are very conservative when it comes to issuing loans for second homes. Your lender may want to take a closer look at your credit history, credit score, home price and the size of your down payment before determining the interest rate for your second mortgage.
Be careful while choosing your payment plan
You can take a second mortgage for 15 years or 30 years. It depends on how much you can pay every month. If you can make higher monthly payments, you can go with a 15-year term mortgage; if not it is better to go for a 30-year term one.
In case you are close to your retirement, it is always better to choose 30 years as the term of your mortgage so that you won’t feel the dent in your monthly budget. Nevertheless, you need to understand that the interest that you pay would be higher in case of a 30 year mortgage when compared to a 15 year mortgage.
Before you apply for a second mortgage, you will have to make sure the monthly mortgage payments of your first home are low. If this is not the case, you may want to think of refinancing your first mortgage so as to qualify for a second mortgage.
Another option you can go for, in order to reduce the monthly mortgage payments of your second home is to take out a home equity loan. You can use the loan proceeds to make a higher down payment on your second home. However, since a home equity comes with its own costs, this option may not be viable during a financial emergency.
It is not going to be so easy
You will be facing stricter rules while obtaining a second mortgage. The process of evaluation that banks follow for second mortgages is totally different.
Most banks assume that you have achieved a financial stable position if you are looking at buying a second home. Your income would be split between your monthly expenses, your first mortgage payment and your second mortgage payment. So, it is assumed that in case of a financial crisis you will be giving least priority to the mortgage payments of your second mortgage.
Your second mortgage lender may require a complete breakdown of your yearly income and your assets. A credit score of 725 to 750 could be expected by most lenders. However, the exact credit score expected might vary from one lender to the other.
The other loans that you may have taken, and your spending habits, will also matter when it comes to getting your second mortgage approved. The payments that you make towards your debts should not exceed 36% of your income if you want your second mortgage application to be approved.
You may want to make a lump sum payment
Most second mortgage applicants are required to make a higher down payment than what they made for their first mortgage. This can be anywhere between 20% and 32% of the value of your home.
Many lenders who may contact you via mortgage leads might offer excellent terms on second mortgages. However, it is always better to choose your plan wisely. It is going to take some efforts; but it will all be worthwhile once you buy your second home.