Financing a second home is very much like financing the first. The primary difference is that lenders have stricter guidelines for second-home loans because they're riskier than loans for primary homes. The thinking is that, in a crunch, a homeowner will protect her primary home first, even if that means defaulting on the loan for the second home. The same loans used for the first home can be used for a second, and there's one additional option available, too: the home equity loan.
Home Equity Loan
A homeowner with enough equity in her primary home to cover the purchase of a second home may take out a home equity loan -- a second mortgage -- on her primary home and use the money to purchase the second home outright. The money can be taken in a lump sum, or the homeowner can apply for a home-equity line of credit. Interest on the line of credit is charged only on the amount of the line that's in use. For example, if a buyer has a $100,000 home-equity line of credit, puts $10,000 down on a $100,000 home and has a closing date six weeks out, she'll only pay interest on the $10,000 during that six weeks. After closing, when she pays for the rest of the home, she'll be charged interest on the entire $100,000.
Fixed-Rate Mortgage
A fixed-rate mortgage has the same interest rate and the same payment for the entire term of the loan. There are many different types of fixed rate loans. The usual terms are 15 or 30 years. The loan-to-value ratio, which is the percentage of the home's value being financed, ranges from 80 to 90, and in some cases 95 percent might be possible although it's less likely with a second home than with a first. These loans would require 20 percent down, 10 percent down or five percent down, respectively. A borrower who puts less than 20 percent down will need to purchase private mortgage insurance to protect the lender in the event that she defaults on the loan.
Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) come in several varieties. A standard ARM has an interest rate and monthly payment that fluctuate. The rate and payment amount readjust at predetermined times. ARMs, like fixed-rate mortgages, typically have 15- or 30-year terms. Some ARMS have adjustable rates only for the first few years of the loan before converting to a fixed rate for the remaining term.
Tags: second home, percent down, line credit, primary home, equity loan
