Mortgage Considerations When Changing A Second Home To An Investment Property
You may be asking yourself, can I turn my second home into a rental property if I have a mortgage on it? The short answer is yes, but there are several considerations. In particular, you must consider the terms of your existing mortgage before converting a second home to a rental property.
Most second home mortgages have more favorable terms than loans for an investment property. Lenders usually require lower down payments and offer interest rates lower than they would for an investment property. Its against the law to make your property look like a second home when you intend to use it as an investment property. As such, misrepresenting the homes use has legal and financial implications.
Lenders, however, cant do much about a legitimate change in occupancy during the term of your mortgage. Just be aware that a change in your homes occupancy status within the first 12 months of ownership may invite greater scrutiny from your mortgage provider. Further, when your mortgage comes up for renewal, your mortgage provider may choose not to renew your mortgage at all given the change in use designation and increased risk profile. Alternatively, if you refinance later down the road, you must also disclose the change in occupancy and secure an investment property loan versus a second home mortgage which may have different terms.
Home Equity Of 20% Or More
Homeowners will need more than 20% equity in their primary residence to qualify for a cash-out refinance. You typically have to leave 20% of the homes value untouched, which means that you can only cash out the amount of equity you have above that threshold.
Leaving 20% equity in the home also has an advantage: the borrower dodges Fannie Mae and Freddie Macs private mortgage insurance requirement.
However, an FHA loan will require FHA mortgage insurance premiums even with 20% equity left in the home.
Maintenance Utilities And Repairs
Just like your first house, theres no getting away from these things on your second one. When researching the location of your second home and associated expenses, remember to take into consideration things like landscaping and potential weatherproofing. For example, if youre purchasing somewhere that has a lush garden, that garden will need to be maintained even when youre not there. The same holds for things like swimming pools, where they may need to be closed during the winter and reopened in the spring. Perhaps your second home is in an area that could be threatened by weather systems, such as tropical storms or hurricanes. Youll need to make sure youre adequately prepared and have people in place who can access the home and take appropriate measures if necessary.
Theres also the cost of utilities and repairs as they come up. If you choose a property manager, they can take care of most of these things in your absence. They would also be the contact for renting out the property if you wanted to do so when not staying there yourself. When the microwave goes out though, or the plumbing backs up, youll want to ensure that youre in a comfortable enough position financially to be able to tackle these things without frustration.
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Second Home Mortgages In North Carolina: What You Need To Know
Not only is North Carolina one of the most beautiful places to visit, but it is also one of the most affordable places to have a second home. From the growing industrial hubs in the city of Charlotte to the peaceful shorelines on the coast of Beaufort, the Tar Heel State is a popular place for tourists to visit and vacationers to dwell.
If youve ever visited North Carolina, you may be thinking that it could be the perfect place for your home away from home or perhaps you see a booming real estate opportunity for an investment property. No matter your unique intentions, theres no time like the present to pursue your homebuying dream.
Were covering everything you need to know about qualifying for a second home mortgage in North Carolina. But first, lets talk about some of the benefits of buying a second home.
The Power Of Interest
For many second mortgage products, you can elect to only make payments on the interest. This creates lower monthly payments, and allows you to have affordable access to the equity in your home before you are ready to sell.
Consider someone who wants to remodel before selling their home or renegotiating their primary mortgage. They can take second mortgage, use those funds to renovate, making interest-only payments. When it comes time to sell or renew, the home is valued at a higher price thanks to the renovations, and then the homeowner pays off the second mortgage.
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Types Of Second Mortgages
There are multiple avenues you can pursue if youre considering a second mortgage and each one has different requirements youll need to meet.
Home Equity Line Of Credit
A home equity line of credit is a great option for individuals who have good credit and more than 20% equity in their home as itll be the most affordable option in terms of interest rates. With a HELOC, you only pay interest on the amount of equity you use. If you have $50,000 available and you only want to use $25,000, youll only get charged interest on the $25,000. HELOCs will give you payment flexibility and lower interest rates but youll need to be disciplined to use it as the line of credit could end up costing more over time if you choose to only pay off the interest as required.
Mortgage Cash-Out Refinancing
Its important to note that a mortgage refinance is not the same as a second mortgage. This option may be a better alternative to a second mortgage, especially when interest rates are low. With a cash-out refinance, youre basically renegotiating your current mortgage to access the equity in your home. When a lender refinances a mortgage, theyre aware that theres already a lien on the property which they can take as collateral if you dont make your payments on time. This isnt the case with second mortgages, so the risk is lower for lenders to refinance.
Mortgage For Second Property
Can You Get A Second Mortgage For Rental Property
Yes, in the sense that getting a second mortgage for an investment property in addition to a main residential mortgage is possible. In fact, some investment mortgage lenders might insist that you already have a mortgage, as there are buy-to-let providers who wont lend to anyone who hasnt been paying a residential mortgage for a set amount of time.
To avoid any confusion around the terminology were using here, this example refers to taking out an investment mortgage in addition to an existing residential mortgage. The investment mortgage would be a second mortgage, but it wouldnt be a second home mortgage, as they are a product category in their own right, and an entirely different kettle of fish.
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Can I Afford A Second Home
Are your finances ship-shape to the point that you can afford to buy a second home? Even if you plan to collect rental income from the property, youll want to be sure its a purchase you can afford, particularly if it will remain vacant for several months a year.
Here are some financial factors to bear in mind.
What Is A Second Home
A second home is just that: a second property where you and your family spend time, away from your primary home. You might also hear a second home referred to as a vacation property. You may rent it out for a few days each year on Airbnb or VRBO, but you primarily use it yourself.
Buying a second home makes financial sense if theres one particular vacation spot you visit regularly. Why spend a fortune on hotels or Airbnb when you can own your own piece of paradise that will hopefully appreciate in value over time?
Lets say you live in San Francisco, but you are an avid skier in the winter and like to hike in the summer, says Rachel Olsen, a real estate agent in California. If you spend many weekends and vacations in Lake Tahoe, it may make sense to purchase a second home there.
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Yes You Can But It May Not Be Your Best Option
If you have a significant amount of equity in your primary residence, you can tap into it through a home equity loan. You can then use that money for any purpose you wish, including buying a second home or an investment property.
However, using a home equity loan to buy another house is not without risks. Its smart to understand the pros and cons before you proceed.
Second Home Vs Investment Property Mortgages
Second home mortgages are a completely different product category to mortgages on investment property. The main thing setting them apart is that second home mortgages are residential and can be used to buy properties that are intended for personal use. This includes holiday homes and secondary residences that you might live in part time.
You wouldnt use a second home mortgage to buy investment property because theyre residential loans which cannot be used for properties the buyer isnt planning to live in.
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Financing Your Second Investment Property
Buying a second property is a goal for many capital investors and prudent families. Perhaps youre considering a weekend getaway, looking for a future retirement property, wanting to size up and rent your current home, or thinking about an investment to pass on to your children. Whatever your reason, youll need a solid financial plan.
Find A Local Real Estate Agent
Your real estate agent is the most important person in this second home process. Theyll work to find you the perfect home, negotiate on your behalf and be there to guide you through the rest of the buying journey.
Be sure to look for an agent local to the area where youll be purchasing. Theyll know the intricacies of the real estate market better than a regional agent, which means they can offer advice on finances and neighborhoods to explore.
When you search for a REALTOR®, be sure to look for a buyers agent only. Working with a dual agent, or an agent who represents both you and the seller, can cause conflicts of interest.
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A Second Mortgage Is A Tool Use It As Such
Second mortgages offer you the opportunity to use the equity in your home for a number of different situations. If you have bad credit and need to consolidate debt, pay off other loans, renovate your home, invest, a downpayment on your next property, funds to support yourself while selling, paying off property or tax arrears, or need emergency funds, a second mortgage is a great tool for Canadians to improve their financial well-being. Be sure to consult the right mortgage professional in your area to discuss your specific situation, and how a second mortgage can help you.
Second Mortgages Help With Bad Credit
If you have bad credit, then borrowing money to consolidate or pay off debt can be challenging. Those with poor credit scores often think obtain a second mortgage is impossible, but ironically, this is likely one of the best tools to help them repair that credit.
Gaining access to your equity can allow you to pay off all of those overdue bills, immediately, and give you piece of mind to get your finances back in order.
A simpler, single payment setup, can also make it easier to have a single target to hit monthly.
Most traditional banks, and even many brokers and alternative lenders, do not offer second mortgages for bad credit borrowers. Its important to speak with a mortgage professional not tied down by these burdensome restrictions, because second mortgages are possible even with a poor credit score. Canada is filled with lenders to work with, and you need someone who will help you find them.
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Second Charge Vs Second Mortgage
A second charge mortgage is often referred to as just a second mortgage. However, this can cause some confusion because a second mortgage may also refer to a second mortgage used to buy a property, rather than an additional loan to the same property. Its usually easy to understand what is meant by the context of the conversation.
You Can Use Your Equity Foranything
One of the most attractive benefits of buying a home is the potential to use the equity you have built up over time. Why let it sit there? Let that money youve earned start working for you!
You can use the funds however youd like, but many people choose to use a second mortgage for home improvements, other investments, a childs college education, an emergency fund, and more.
One popular usage of a second mortgage is to make an investment, like buying a rental property. Instead of saving up 20% for a down payment, you can tap into the equity of your existing home. The bonus of using a second mortgage for investment purposes is that the entire interest on that loan now becomes a tax deduction.
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Is Buying A Second Property A Good Investment
If you have yet to finish paying off your first home mortgage,buying a second property needs to be a balanced decision. For one thing, the more debt you have and this includes your first mortgage and any other monthly repayments, such as credit cards the more reluctant lenders will be. Your income calculations should include your current mortgage repayments, your potential second property mortgage repayments, credit card payments, your day-to-day spending, andupkeep or renovation costs for both properties.
Key Considerations For Buying A Second Home
A second home may be a place to vacation, but owning it isnt a carefree activity. Youll need to plan for additional expenses and pay attention to the amount of time you or others who are paying to use it spend there.
Affordability: If you arent paying all-cash for your second home, youre going to have a second mortgage payment. Take a close look at your budget to determine if that extra monthly cost makes sense for your finances. Youll also need to prepare for another homeowners insurance premium, utility bills, property taxes and all the other expenses of owning a second home.
Occupancy requirements: If youre buying a second home, you may be thinking about making some money from it when youre not using it. However, if you rent it out too often, your second home would be considered an investment property and could be subject to different requirements. If your loan is backed by Fannie Mae or Freddie Mac, for example, the property must be available primarily for borrowers personal use and enjoyment for more than half of the calendar year. The IRS has rules, too: If you rent your second home out for more than 14 days a year, youll need to report the rental income.
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Property Investment Costs And Other Things To Consider
When youre thinking of buying a second house and renting your first property, youll need to allow for additional costs that may arise. Your rental income may cover these, but its wise to have a positive cash flow or a cash buffer.
These costs can include:
- Rent shortfall. If your home loan repayments and ongoing property costs are greater than the rental income youre getting, then youll need to cover the shortfall.
- Tenant loss. You need to have enough cash saved to make mortgage repayments should your rental become untenanted
- Maintenance costs. Every property needs maintenance. You will need to budget for emergency repairs, regular maintenance and possibly renovations.
- Bill payments. As the owner youre still responsible for paying certain bills, such as water, council fees, and if you own an apartment, even strata fees.
- Landlord insurance. You may need to pay landlord insurance, which can include building insurance, landlord contents insurance and property owner liability insurance.
- Real estate fees. You may need to pay property management fees if you use a real estate agent to manage the property on your behalf.
- Home loan rate changes. If you have a variable rate home loan you will need to make sure you can afford any rate increase
- Change in circumstances. Make sure you consider whether you can cover the loan repayments if your personal circumstances change.
Pros And Cons Of Using Equity To Buy Another Home
Before you use a home equity loan for a second home, consider the pros and cons of taking equity out of your home to buy another house.
Pros
- Youll reserve your cash flow. Using home equity to buy a second home keeps cash in your pocket that you would otherwise use for the home purchase. This increased cash flow can result in a healthier emergency fund or go towards other investments.
- Youll increase your borrowing power. Buying a house with equity will allow you to make a larger down payment or even cover the entire cost making you the equivalent of a cash buyer.
- Youll borrow at a lower interest rate than with other forms of borrowing. Home equity products typically have lower interest rates than unsecured loans, such as personal loans. Using home equity to purchase a new home will be less expensive than borrowing without putting up collateral.
- Youll have better approval chances than with an additional mortgage. Home equity loans are less risky for lenders than mortgages on second homes because a borrower’s priority is typically with their primary residence. This may make it easier to get a home equity loan to buy another house than a new separate mortgage.
Cons
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