If you are planning to buy a second home without paying for it in cash, you may need to look at financing the purchase through a second home mortgage. In the simplest of terms, this is a second loan against a home, which still has an existing mortgage. It could also be mortgage on a residential property that hasn’t been lived in for the greater part of the year. Either way, there are some requirements and technicalities involved in procuring such a loan.
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Reasons for this Type of Mortgage
Second home mortgages are made for a variety of reasons. Some avail of these to buy second homes, which they will fix and sell when it becomes possible to make a reasonable profit while some actually buy homes as a second residence near their children’s colleges or universities.
Very often, homeowners take out a second mortgage to buy property that they will rent out. This rental income is expected to help pay for the mortgage even as the property increases in value over time. This positive projection will hold true only if the property is rented out consistently to good tenants and if it does rise in value.
Other second mortgages are taken out in order to buy holiday homes to be used personally for years before being sold. Often, the anticipated sale is seen as an investment towards retirement.
The Nature of this Type of Mortgage
A second mortgage taken out on a home has some distinct characteristics. It is subordinate to the first mortgage so that in the event of a default, the first mortgage is paid off first. Partly because of this, second mortgages are generally considered riskier by lenders who will charge higher interest rates for it. Usually, a second home mortgage is taken out as a home equity loan so lenders will assess the available equity in the first mortgage before granting it.
These mortgages can be payable in thirty years or a year, depending on how the loan is structured. The holder of the lien on the second mortgage can foreclose when the homeowner defaults in payments for the second mortgage. This foreclosure can be accomplished even when payments for the first mortgage are up-to-date.
If you live in Rhode Island, you may want to contact embrace home loans RI to find out what the requirements are. Requirements for a second mortgage on a home are usually tighter than requirements for the first mortgage. Lenders usually need to see that there is substantial equity on the first mortgage and the debt-to-income ratio of the applicant is low. On top of that, a credit rating of about 725 is required along with a solid history of employment. What lenders want to see is whether the borrower can sustain payments independent of rental incomes or not.
Approval of a second mortgage taken out for purchasing a second home is also dependent on the property to be purchased. The second home should be a single-unit abode. It is to be occupied by the borrower for part of the year and is not to be placed under any time-sharing agreement. The second home should be a reasonable distance away from the principal residence of the borrower.
Managing Second Mortgages
You are generally charged higher interest rates for a second mortgage. Moreover, the fees involved in this transaction would probably be higher too. Perhaps the biggest risk of all with this type of mortgage is the possibility of foreclosure if you default on the first or the second loan.
An alternative to a second mortgage is to refinance the current mortgage on your home and get cash. This may enable you to buy the second house for cash or at least make a substantial down payment on the second home and incur a lower loan. At the same time, the bigger down payment or the cash purchase should help get a bargain.
If you find yourself wanting to buy a second home and needing to make a loan to buy it, the first thing you must do is get in touch with a reliable financial adviser who will help you weigh all your options to make your investment worthwhile. This way, owning a second home will be problem-free from start to finish.