Is a second home mortgage loan right for you?
Are you considering a second home mortgage loan? Who hasn't, at one time or another, dreamed of their own little piece of beachfront, or a rustic cabin in the woods, or a condo overlooking the water in a resort town? Of course, you have to consider how you're going to afford it. If you don't have a ton of ready cash, you're going to need a loan, so better find out about home mortgage rates. And if you're going to borrow using your main residence as collateral, that residence is going to have to be worth more than what you already owe.
Getting a Loan
You're going to have to convince your potential lender that you're a really good risk, if you're going to get a loan for a second home. That's simply because people are more likely to default on second-home payments than they are on their primary residence. They're also more likely to fall behind on insurance or property taxes, or to neglect maintenance, thereby lowering the value of the property. You should also consider home mortgage rates before thinking of buying a second home.
The first issue your lender will consider is your debt-to-income ratio. This is calculated by dividing your total monthly payments on all your existing debts by your gross income per month. If it's below 36%, you'll probably get the loan, assuming that you have a good credit rating and no history of delinquency. You might be able to get a second home mortgage loan with a higher debt-to-income ratio, but you'll need to do some shopping around in Orange County, California. You should also be aware of home mortgage rates.
You'll also have to make a down payment of at least 20% at the very least. It could be even as much as 40%. A bigger down payment reduces the loan-to-value ratio, which is calculated by taking the current value of the property and dividing it by the amount of the loan. The smaller the loan, and the greater the value, the higher the likelihood of the lender recovering what's owed if you should happen to default, and therefore, the greater the likelihood of you getting the second home mortgage loan.
You'll also probably pay a higher rate of interest on your second home mortgage loan than you're paying on your first, again, because of the greater risk to the lender.
Consider Your Comfort Level
Even if you can get an approval for a second home mortgage loan, ask yourself how comfortable you'll be with the additional obligation. Do you have "wiggle room" financially to cover upkeep and repairs? What happens if your taxes and insurance go up? What if you lose your job or have to take a pay cut?
This isn't meant to discourage you, but unless you're wealthy, you should do some serious thinking. Keep in mind that it's not just the initial purchase price - you're going to have all the same expenses on your second home in Orange County, California as you do on your primary residence. Even if you rent your second home out for part of the year, you might not make enough to offset the mortgage payments and the upkeep. And what if your tenants bail on you? Will you have enough in reserve to offset the loss in income? Think before you go for a second home mortgage loan.
IT'S UP TO YOU...
And, of course, to your lender. This isn't meant to be all gloom and doom. A second home can be a source of great pleasure to you and your family. The main thing is to be sure that you can afford it. Do some mathematics and check out home mortgage rates. A reputable lender will help you to consider all the pros and cons, and will make every effort to ensure that you don't end up in over your head, for their benefit as much as for your own. So before you make the final decision, consider all the possible outcomes, and proceed accordingly.