A recent study from the National Association Realtors found that American homeowners gained over $8.2 trillion dollars in housing wealth over the past decade. And with home prices and inflation skyrocketing, there has never been a better time to put your money in real estate. Now might be a good time to buy a second home and watch your equity build wealth for you over the next several years. You could use it as your own personal vacation home, let your children live in it, or even rent it out for extra income. But taking on another mortgage can be a daunting financial task. Fortunately, in many cases there are ways to make a second home work into your budget.
Run the Numbers
Your first step should be to take a look at your income, assets, and current debt load to see what you could reasonably take on when it comes to buying a second home. There are plenty of online mortgage calculators that can help you determine where you stand financially. You can also talk to your lender for more detailed questions and assistance.
Save Up Cash
While paying for a second home with cash might sound crazy, in some parts of the country it can be doable. If you can find a modest place or even a manageable fixer-upper, you might be able to wait and save enough to buy a second home outright. All that money then becomes equity and can just grow unfettered as the market climbs.
Traditional Loan
There are mortgages designed specifically for second home purchases. The benefit is that you usually get decent interest rates and a fixed payment spread over 30 years. However, the interest rates on second home loans are generally higher than on primary residence mortgages and the down payment requirements are often much higher than on first loans. You will also likely need a higher credit score and greater cash reserves.
Cash-out Refinance
Another way to access all the money tied up in your current house is to do a cash-out refinance. This pays off your current mortgage with an entirely new and larger loan, giving you cash from your equity to use however you want. Depending on the price of your second home, that money could pay for your purchase or be used as a down payment. Of course, you have to pay for higher risk, so interest rates might be higher for taking cash out of your equity and you might need a higher credit score than you did to buy your first home.
Loan Assumption
You could always try to negotiate with the owner of the property you want to buy to assume their current mortgage. This might be especially profitable if they already have a loan with a super low interest rate or terms. Loan assumptions are fairly uncommon, so it might be a challenge to find a seller willing to work with you, but if you do it could pay off in the end.
Buying a second home can require some creative thinking, but the financial benefits of long-term equity can make it all worth it!
