Can You Afford a Mortgage on a Second Home?
“I want a second home.” There. You said it. (Maybe even out loud!)
Have you always wanted a beach house? How about a cottage by the lake? Or a mountain cabin? Of course, you have. But, as you’ve probably already guessed, wishing doesn’t make it so. What’s the best way to afford a second home? Well, we don’t know the best way for you, but here are seven options to make it happen. Before we dive in, though, here's a quick primer on owning a second home, for the uninitiated newcomers out there.
Have a pile of cash
Paying cash for your vacation house is a great option if you can do it. Is that not a helpful suggestion? Moving on…
A home equity line of credit (HELOC)
If you’ve built equity in your primary residence, you may be able to get a HELOC to cover the down payment on your second home, or even the full amount. Do remember that lenders might approve you for more loan than you’ll feel comfortable paying.
If you’re using a HELOC to cover the down payment, you’ll be paying three mortgages: the first mortgage on your primary residence, the HELOC, and the primary mortgage on your second home.
If those three numbers add up to an amount that will prevent you from being able to take any time off work to enjoy a vacation in your new place, it might be best to wait.
Cash-out refinance on your primary residence
This option is another way of using the equity in your home to buy the new place.
Unlike a HELOC, this wouldn’t add a payment, though the amount of your monthly mortgage payment might increase.
Reverse mortgage
Can you use a reverse mortgage to buy a second home? Well, sure. Should you? That’s another question.
Ask yourself these questions to find out if you're ready for a second home.
Conventional loan
You can buy your second home just like you bought your first. You may need a higher down payment, a better credit score, and a really good debt to income ratio to qualify, though.
Buy with a friend or family member
Sharing the burden can be a great way to afford a second home, but it can also be absolutely miserable if you aren’t prepared.
Make sure you’re ready to commit before you buy with a partner.
Treat it like an investment property
Renting your home to other vacationers will limit the amount of time you can use it each year, but you will also be able to claim certain deductions--like some maintenance costs--when it’s classified as a rental property.
As your income increases or you have more equity, you can always stop renting it. Being a landlord, for now, may allow you to start building equity sooner than if you wait until you can afford two homes. Just make sure you can find tenants for your rental.
Can you afford a vacation home? It’s a complicated question, but knowing your options is the first step!
Not sure if you have the funds?
If you're a little uncertain about your financial situation with respect to this imminent second home purchase, you might want to utilize one of our calculators to figure out where you stand money wise.
With Mortgages.com's Home Affordability Calculator, you can factor together your annual income, expected monthly mortgage payment(s), and your lender's interest rate, among other things, to help determine just how much you should spend on a house.
Still unsure after you've made a few calculations? In our experience, it helps to ponder a few of these questions first before you make any big, serious commitments. Ask yourself the following:
- Do I like to spend my weekends away in the same place?
- Do I have an easy way to get there, or will the trip bankrupt me over the long haul?
- Do I have the disposable income at hand to furnish a whole other residence?
- Can I afford the home without having to rent it out through Airbnb or some other vacation rental agency?
- Am I able to get away from work and other obligations often enough to justify this purchase?