What To Consider When Purchasing a Second Home

 A second home to many is a vacation home or an investment home.  In order for it to be a smart investment, you should do your research and plan ahead.  So it will not become a financial heartache, here are several things to consider before you purchase a second home.

1. What Will You Use It For?

As mentioned before, a second home can be used for a vacation home or investment and can even be used as a secondary residence for work. You will need to decide what you are using your second home because a lender will need to know.  Investment properties are more risky for a lender while a vacation home or secondary residence are not as risky.  The secondary residency and vacation homes will usually have a lower interest rate than an investment property.

2. How WIll You Finance It?

Unless you have a chunk of cash on hand you will more than likely need to get a loan to purchase your second home.  Remember depending on what you are using your second home for will determine which loan option is right for you.  If you are purchasing a second home as a vacation home, then you will more than likely qualify for a conventional mortgage, secondary mortgage, or a jumbo loan.  If you have a current mortgage and a lot of equity in your primary home, you might be able to obtain a Home Equity Line of Credit (HELOC) or cash-out refinance.

3. Do You Have the Funds?

You want to create a budget to make sure you can afford closing costs as well as ongoing costs that come with owning a second home.  When creating the budget, keep in mind the down payment for a second home is typically a minimum of 25% of the purchase price.  Your debt-to-income (DTI) ratio is 43% or lower in order to qualify for a mortgage for a second home.  As far as homeowner insurance goes, you will need to take out comprehensive insurance on a second home no matter if it is a vacation home or you are renting it as an investment.

4. You Don’t Have To Go It Alone

To make it a bit more affordable and easier for financing, many purchase a second home with friends and family and split the costs.  In order for it to work, you need to treat the arrangement as a business.  Everyone can benefit, gain an asset and save money by splitting the costs.

5. Make a Plan for When It’s Not in Use

A second home might have times when it is not being used, so it is good to have a plan for this time.  If this is a rental income property, you need to come up with a plan if you do not find a tenant right off the bat.  If it is a vacation home, think about renting the home out to other vacationers when you are not using it. If this is the case, there are tons of management companies that can take care of the process.

If you are in the market for a second home, now might be a perfect time for you to purchase one.  Choose a realtor from the area that can help with the process from start to finish.  A local sales agent can be especially beneficial when it comes to vacation homes, as they know the area best.

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Tips to Find the Best Loan for A First Time Homebuyer

There are many different kinds of mortgages to choose when purchasing a home. Not every mortgage is right for you. Here are some tips to follow when choosing which mortgage best fits your needs.
Do your homework. You will want to first research special mortgage programs. There are a great number of programs out there which can assist first-time home buyers. Programs can help with down payments, lower your interest rate or help with other expenses you might have such as a student loan. These programs can help you along the way by allowing you to build equity in your home. Professionals can help with finding the best program to suit your needs, check with your lender or Realtor.

Go with a local. Big programs such as federal programs are more well known but there are many programs for first time home buyers through their city or state. Detroit and Baltimore have used first-time home buyer programs to promote revitalization in their downtown areas. Many states have used

programs to urge first-time homebuyers to purchase their first home in rural areas. Always check your city or state government’s websites to see if there are any programs available to assist you. Another resource would be the community development or housing department.

Don’t overlook your mortgage rate. An obvious focal point is the price of your home. This is not the only thing you should focus on. Your mortgage rate is just as important. This number can tell you how much you will pay in interest every month. The lower the rate, the less you will pay. The easiest way to lower your rate is by a good credit score. Not every first-time buyer has a solid 20 % to put down with an excellent credit score. Many lenders allow you to purchase discount points with can lower your interest rate. Purchasing points is prepaying your interest rate which lowers your overall interest rate by approximately .25%. There are positives and negatives to buying down your rate with discount points. Your lender can help you with this decision.

There’s always an adjustable-rate mortgage (ARM). This can be a great way to start off your first home buying experience. How an ARM works is simple. You will start off with a set period with a fixed rate which will then adjust after a certain period of time. In other words, if you have a 5/1 ARM, you will have a fixed rate for 5 years and then after the 5 years, your interest rate will adjust every year. The rates will not always rise but can also fall. If the rates have gone down you could end up paying less but if it goes up, you will pay more. This is a great way for a first-time to use the first 5 years to improve credit, lower debt and raise your income in order to get a 15 or 30-year fixed-rate mortgage.

Just like an employer interviews for the right employee, the same goes for the right lender. You need to talk to several lenders about getting a mortgage. Shopping around can give you negotiating power and the lowest mortgage rate. You will want to research average rates for your area.

Have your paperwork in order. When applying for a mortgage, your lender will want your monetary life story. Get all your documents together before meeting with a lender. Many lenders will not lock in a rate and start your application until they have all your documents.

Keep your finances the same. Do not make a huge financial change when you are in the process of obtaining a mortgage. Do not apply for a new credit card, get a new car loan, or change jobs. If you do this, the mortgage lender will have to start your application process all over again. You will need to wait even longer to close on your new home.

Getting a loan for a home can be a daunting task but if you do your due diligence, the process will be a lot less painful in the end.

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