Taking out two mortgages on the same house simultaneously may sound like a bad idea at first glance, but "piggyback loans" are a common way to make a smaller down payment or avoid paying...
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Financing a Second Home with a Second Mortgage Loan
Many people have difficulty paying one, not to mention two, mortgages. As a result, lenders will take a closer look at the income-to-expense ratios and credit scores of would-be second homebuyers. For many homeowners, a second mortgage will spread the monthly budget thin. But lenders also know that owners of second homes typically have excellent credit and substantially higher than average income. And they may even increase their income through ownership of another home.
Required down payments, interest rates, and "points" (origination fees) are typically higher for second mortgages. But banks and other lenders have benefited from the increase in business generated by those with enough cash to invest in more than one home. They welcome qualified customers, and the opportunities are better than ever for those in the market for second mortgages.
Financing with a Home Equity Line of Credit
You can also finance home number two through a mortgage loan based on the equity in home number one. Banks will normally charge higher interest rates for an equity line of credit loan, but you can avoid many of the closing costs associated with a traditional mortgage.
Second Mortgage Home Loan on Income Producing Property
To smooth the way for securing funds for an income producing second home, you'll want to demonstrate a convincing plan of action. After all, becoming a landlord is a business, and banks want to see confident and realistic business plans before issuing loans. For instance, if the property has a prior history of income generation, lenders will be more comfortable making the loan. In order to show proof of income potential on a second home, you can use accounting records from the previous owner, or hire a professional appraiser to do an analysis by comparing the property to other successful income-producing properties in the same area.
If you plan to only use the home yourself, perhaps as a holiday getaway or summer residence, you may be able to deduct the mortgage interest and property taxes, and some of your closing costs, as well. If you plan to rent or lease your new property for income, you may not be entitled to the same deductions. However, you may be able to deduct a portion of your costs for utilities, repairs, and many of the day-to-day expenses related to the upkeep of the property. Consult your tax advisor to find out exactly which benefits will apply to you.
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