Contrary to what many think, financing a second home is not the same as a primary home. Second-home financing is more complex and subject to more stringent regulations. You may also face additional taxes and expenses that apply to second homes and vacation properties. If you’re thinking of financing a second home, here are some tips to make the process easier.
Options for Financing a Home
A loan officer Las Vegas will tell you that the best method for financing a second home is home equity. Home equity for a primary residence is generally your largest asset. It is also high-quality collateral with more favorable interest rates for reverse mortgages Las Vegas (depending on your age), refinancing using cash, and home equity loans. You can also finance a second home using 401(k) financing or a loan assumption. However, these methods carry some risks.
Make a Down Payment
As with a primary residence, you’ll need to make a down payment on your second home. If you have a high-quality application, you may qualify for a 10% down payment. However, most lenders ask for a down payment of 20% for a second home. If you don’t have the cash on hand to make a down payment, you may qualify for assistance through a loan.
Get a Home Equity Loan
According to the National Association of Realtors, up to one-fifth of second-home buyers use equity from a primary residence to put a down payment on a second home. A home equity loan lets you borrow money against the equity in a primary home. Home equity loans usually include a lump-sum payment that is repaid in monthly increments. A home equity loan has a fixed interest rate. This type of loan gives you access to sufficient cash funds to purchase a second home while making reasonable and predictable monthly payments.
Use a Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) is a revolving line of credit. It allows you to withdraw cash and make repayments, similar to the way a credit card works. With a HELOC, however, you can negatively impact your credit score by drawing on your entire line of credit. A HELOC also has variable interest rates, which makes your monthly payments less predictable.
If you can’t make payments on your home loan, you may end up defaulting. Doing so puts your primary and secondary homes at risk. Therefore, lenders want some proof of your ability to make loan payments. This can include reserves and proof of income. You may also need a specific credit score.
Buying a second home is exciting, but it can also be challenging to get financing. If you need assistance financing a second home or figuring out the best way to make monthly loan payments, don’t hesitate to contact us for assistance and expert guidance.