Financing a Second Home

If you’re one of the lucky ones who has a steady job and cash in the bank, you may be itching to buy a second home. With low interest rates and sellers dying to sell, this may be the perfect time.

Most Americans don’t have the opportunity to make their dreams come true. But if your fantasies involve watching sunsets from the porch of your lakefront property, or taking long walks on the beach in front of your oceanfront condo, there has never been a better time to purchase your dream second home.

You’re not alone in this fantasy…according to the National Association of Realtors, while new home sales were down last year, vacation-home sales were up 7.9 percent.

What to look for

Before you rush into anything, analyze the pros and cons of being a second homeowner. Do you have the necessary capital to take care of another home? It’s not just upfront money for a mortgage and closing costs -- it’s taxes, insurance, and home maintenance. These expenses just keep on giving -- headaches.

Also, consider what the property will be like in the off-season. A beachfront property in Cape Cod is magnificent in the summer, but what it will be like during the snowy season? A home in the mountains offers privacy thanks to the luxurious greenery…but will you be too close to a neighbor when all the leaves fall off the trees in autumn?

Mortgages for second homes

If you can handle all obstacles, it’s time to organize financing. There are three options: a traditional vacation home mortgage on your new property, or a mortgage refinance or second mortgage on your primary residence.

Vacation home mortgages come in a variety of sizes and shapes, including fixed- and adjustable-rate, and jumbo. The biggest disadvantage is that they’ll most likely carry a higher interest rate than a traditional loan, since there’s more risk involved. You’ll also need to prove to the bank that you can carry a second home worry free, so there will be rigorous scrutiny of your finances.

If you’ve got substantial equity in your primary home, you may be better off looking there as a source of financing. Your first option would be a cash-out mortgage refinance, which would allow you to take full advantage of today’s historically low interest rates. The biggest obstacle would be a whole new round of closing costs, which could run you 3 to 6 percent of the loan amount.

Anther option would be a second mortgage in the form of a fixed-rate home equity loan or an adjustable-rate home equity line of credit (HELOC).  Although interest rates would be a bit higher than with a mortgage refinance, you’d have closing costs and the option to choose the full amount upfront, or a revolving line of credit.

If you’re really one of the lucky ones, you could just pay cash. But that would tie up your funds. It may be a more savvy decision to use one of the above mortgages and use your cash to fulfill all your other dreams.