Perhaps you are looking into buying a holiday home in a different country, or maybe you are investing in another property nearby so that you can rent it out? Or perhaps you are looking to buy a home where you plan to enjoy your retirement? Whether you are a real estate investor or not, buying a second home can be a great move financially. However, there are a lot of things that you need to know in advance before buying your property.
Getting a mortgage for your second home is similar to the process that you will have gone through to buy your first property. The approval for the loan will depend on your savings, income, credit rating and the amount of deposit you can afford to put down. Although there are a few differences to keep in mind, as you will need to prove that you are able to pay for two mortgages.
There are many options available out there for mortgages for your second home, so you don’t need to go with the first arrangement you come across. Take the time and do your research, so that you can find the very best mortgage with terms and rates that suit you.
Here are some important mortgage tips that you should keep in mind when you are buying a second property:
Factoring the Extra Expenses
When you are calculating whether you can afford a mortgage to buy a second home, make sure that you include all of the other factors involved. For example, don’t forget to include property taxes, interest, homeowners insurance, maintenance, utility bills and possible repairs. If you fail to budget in advance for these, you will find that they will come up unexpectedly and blow your budget out of the water – so this is why it is important to find out in advance!
Should You Take Out a Home Equity Loan?
Some homeowners who have a substantial amount of equity in their property see a home equity loan as a good option for them when buying a second home. However, if you have lost equity in your home due to a drop in property values over the last few years, you might find that this is not an option. Also, sometimes mortgage lenders will be hesitant to approve a home loan if it drains the equity from your principal residence, out of concern that the home values will decline in the future. Talk to your mortgage lender and find out if this option is best for you.
Higher Interest Rates
It is important to know that often second mortgages on vacation homes will have a higher interest rate than on a primary residence. This is because the lenders will base the interest rate on risk. They believe that you will be more likely to default on the loan for your second home than on the loan for your primary residence.
Planning to Rent Out Your Holiday Home?
Many people choose to buy a second holiday home and then rent it out when they are not using it, using the income from renting to supplement the mortgage. This can be a great idea, but you should know that not every lender will count your rental income for your loan qualification. Some lenders will only allow a percentage of the rent payments to be used as income and others might require you to show documentation that the home is being consistently rented.
Home Insurance Necessary
Many mortgage lenders will require that you take out insurance cover for your second home, which will protect your property from any damage including floods, fire and theft. This is valuable information to know for your budget, because the cost of insurance on a second home is usually higher than on a primary residence. This is because the second home is much more likely to be unoccupied for long periods of time.
Getting a mortgage for your second home is a complex process, so don’t rush into it and take the time to learn your options. There are many possibilities to choose from, so take your time and compare to find the right one for you – so that you can enjoy your second home free of mortgage stress.