A mortgage on a second home is almost always more expensive than the first. Owning two homes is obviously a little more risky for banks and lending institutions, as a result, higher interest rates for the borrower. Usually interest rates on second home mortgages are 1/4 to 1/2 points higher than the first.
With today’s weak economy and the recent housing bust it will continue to get harder for investors and vacation home seekers to get good rates on a second mortgage. Banks have lost billions of dollars as a result of home foreclosures and unpaid mortgages. The government has started to impose restrictions on how banks do loans. Banks and lending institutions are now a little more hesitant on loaning money to potential home buyers and investors.
With that being said how do you increases your chances of successfully getting a mortgage on a second home, rental property or a vacation property? Here are some suggestions:
Obviously, the best option is to save a down payment for the second home of at least 20%, preferably more. Banks will be much more likely to consider your for a loan if you start out with 20% equity in your home. This way if you default on the loan it will be much easier for them to recoup their losses.
- A second option is to take out a home equity loan or a home equity line of credit (HELOC) on your first home to pay for the second home or at least a large portion. Rates for a home equity loan are a little more expensive than a first mortgage but it might increase the odds of getting the loan because your first home stands good for the loan. Be careful here though because the IRS will only allow you to deduct up to $100,000 of interest on a home equity loan.
- Decrease your debt to income ratio before trying to buy a second home. One of the factors banks and lending institutions look at when applying for a mortgage is your debt to income ratio. Paying off unsecured debt such as credit cards and student loans will increase your chances of getting approved for a loan.
- Finally, don’t try to buy a house you can’t afford. Do careful research and triple check your budget. Make sure that you are not stretching yourself too thin when it comes to buying a second home. When it comes to owning a second home, it’s ok to have dreams, but eventually you will have to face reality!