Buying a Second Home? What You Need to Know about Buying a 2nd Home

2017 Guide to Buying a Second Home | Essential Information about Buying a 2nd Home

Buying a second home is undoubtedly a big decision, though not as difficult as it once was. There’s no question that there are still a lot of unknowns about how best to do this, or if it’s even possible for some people.

This review aims to highlight the possibilities and pitfalls of buying a 2^nd home to help anyone decide if it is right for them.

First and foremost, before buying a second property, a prospective buyer needs to develop a good understanding of the requirements and the process. He or she should carefully consider a variety of factors, including:

The potential dangers and advantages of two mortgages
Can they get a second mortgage
Identifying what exactly is a second mortgage loan
The process for second mortgage foreclosure
The collateral and financial barriers to entry

Of course, none of this is new. These questions have been central to the practice of buying a second home for a long time, but the answers to them may be very different now. In addition, the answers may be wildly different depending on where the prospective buyer lives. Due to these factors, careful research is very important before even considering buying a second home.

This review aims to break down the various elements involved and give an informed account of how they might affect potential buyers. With this, anyone should be able to find out if taking out a second mortgage or buying a second house is right for them.

Reasons for Buying a Second Home

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There are as many reasons for wanting to buy a second home as there are people doing it. Some want a vacation home—somewhere they can come back to time and again that’s comfortable and familiar.

Others view buying a 2^nd home as an investment, intending to open the property up for renters. Still, more buy a second property and plan to sell their first one at a later date.

The first thing any potential buyer needs to think about is his or her reason for buying a second home.

Though all uses require a considerable investment, a buyer asking if they can get second mortgage in order to rent out a property (or sell an old one) means that some of the cost of the mortgage may be made back later. The financial burden is potentially smaller than if they intend to use it as a second personal home or for vacation purposes.

On the other hand, buying a second home for personal use is a simpler process if the buyer has the money to do it. In many places, renting out a property requires licensing and regular maintenance to ensure that it is livable for tenants.

These and numerous other factors take significant time and energy. A vacation home, on the other hand, is kept precisely as the owner wishes it to be.

For easy reference, here is a summary of the main reasons for buying a second property:

To make a return on the investment through rent payments
To buy as a replacement for an older property that will be sold
To buy as a second home or vacation property for personal use

Other Things to Consider about Buying a Second Home

Once they have a clear idea about what they intend to do with their new property, prospective buyers should carefully consider the following before investing:

Consider changing property values in different areas.
Be aware of personal finances and how stable they are.
Focus on neighborhoods that are likely to increase in value.
Work with an agent that has experience in the real estate field.
Learn about the tax situation in any given area.

So what do these points mean in practical terms? Several of the issues central to these points stem from getting to know the area.

If someone is buying a second home in his or her local area, it is a simple matter to research property values. It is important to have a clear idea of what the neighborhood is like. This might prove more difficult for someone who is less familiar with the local area.

In these cases, it is even more important to consider working with an agent who knows a lot about the area the buyer is considering. Without that, it could be very easy to buy a second house that ends up losing money in the long run, which could be a serious problem and result in a second mortgage foreclosure.

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Tax, Finance, and Managing Two Mortgages

A professional real estate agent will also be able help buyers fully understand the relevant tax laws.

This can get very complex, especially for buyers with no previous investment experience, and it is easy to make a costly mistake if great care isn’t taken. Buyers need to first be aware of what a second mortgage is and whether they can get a second mortgage loan at all.

One example that demonstrates how useful knowledge of the tax system can be pertains to taxation on rental income. If an owner rents out her home for fewer than 15 days per year, she will not be taxed for income related to this.

She will also not, however, be able to deduct renting-related expenses. Renting for 15 days or more makes the income taxable, but also allows for related deductions.

Understanding how this works is important when balancing two mortgages. Balancing this budget is vital in avoiding a second mortgage foreclosure, which will negatively affect a buyer’s personal finances. It is vital to bear this risk in mind and to be aware of your personal finances before committing to buying a 2^nd home.

Personal Finances and Risk

Though some experts claim that there is little truth to the idea that second homes are only for the very wealthy, there is no question that a buyer still needs significant resources before a bank will agree to offer them a mortgage for buying a second home.

Before asking a bank, “Can I get a second mortgage?” it is important to ask if you even should. Aside from the steep initial investment and the tax issues already discussed, what is a second mortgage loan but an added risk for the lender? This means that it will usually come with a much higher interest rate.

Banks view investors as much riskier prospects than normal home buyers, so they will want reassurance that they’ll be paid back.

There is also the issue of maintenance. Maintaining a single home can be time consuming and even expensive, should damage occur. Buying a second home could more than double this requirement, especially if the owner intends to rent it. It is possible that, even if a bank agrees to allow two mortgages at an affordable rate, the costs of maintaining the second property could spiral.

The primary risk here is that buying a second home may result in an investment becoming a money pit. In short, it may cost more to maintain than the owner can make from it. This could impact the buyer’s personal wealth and credit rating. It is, therefore, essential that an inexperienced investor considers whether this is really for him, and chooses his investment properties very carefully.

Investment Properties and Dealing with Tenants

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One of the most useful answers to the question of what is a second mortgage loan, especially for buyers who intend to rent out their second property, is that it is a kind of business loan. It requires a lot of responsibility and willingness to absorb losses.

One of the surest things about work as a landlord is how unpredictable tenants can be.

Damage to the property in unexpected ways—whether by accident, neglect, or intentional destruction—is inevitable when tenants are involved. Costs for this should be built in to any prospective budget. Buying a second house for rent always carries this risk, and banks will want to see that a potential investor has considered this before offering him or her two mortgages.

What Is a Second Mortgage?

This simplest answer to this may seem obvious. A second mortgage is an additional loan, usually from a bank, toward the purchase of a property taken out before a previous mortgage is fully paid. As previously discussed, a second mortgage is only given under intense scrutiny. It usually requires a higher initial down payment and comes with a higher interest rate.

But what about the technicalities? The second of two mortgages usually requires a higher down payment of around 20–30% compared to those offered on first mortgages. Interest rates can also be high, though these will vary depending on the lender. Buying a second home also comes with stricter requirements beyond the initial cost. It is recommended that buyers approach local lenders first to avoid problems later. This is even more the case if the buyer is relying on rental income to cover some of his down payment for buying a second property.

To cut down on the considerable burden of two mortgages, buyers should also consider other ownership options. Cooperative ownership when buying a second house can split the costs, risks, and work involved. Keep in mind, though, that this comes with its own financing and ownership complications. These may negate any advantages.

It is worth shopping around for different mortgage offers, as doing so may afford the buyer a better deal—particularly on interest rates.

Second Mortgages—Technical Details

In technical financial terms, a second mortgage is a loan that uses a property already subject to a mortgage as security. This first mortgage is known as a senior lien, in technical terms, and the loan can come in a number of different forms. Some of the most common for buying a second home are home equity loans and home equity lines of credit (or HELOCs).

A senior lien always takes priority over a second mortgage (or junior lien), which is largely determined by the date of commencement of each mortgage in the event of complications or default.

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Can I Get a Second Mortgage?

There are several key elements a buyer must be sure to have once she has made the decision to apply for a mortgage for buying a second home:

A clear budget for buying and maintaining a 2^nd home
Enough capital or income to absorb unexpected losses
Time to commit to properly maintain the property
Knowledge of the neighborhood the property is in
Knowledge of the tax implications of buying a second home
Willingness to shop around to different lenders to get a good deal

This should act as a checklist for those looking into buying a second property once they’ve committed to finding out how they can get a second mortgage loan.

Any reputable lender will want to know that an applicant is aware of all of these elements. The lender will likely want to see evidence that he or she has considered at least some of them before approving an application. It is up to the applicant to demonstrate this, and they must be able to prove to the lender that he or she is reliable enough to juggle two mortgages. The last point on the list, regarding shopping around, may encourage lenders to offer better rates in order to be competitive with a buyer they like.

Second Mortgage Foreclosure

Clearly, no one enters into buying a second home expecting to fail. In most cases, banks will avoid allowing those buying a second house to do so if there is too much risk involved. Even the safest, most financially prepared people may have to deal with drastic changes in life circumstances. This is especially true during difficult economic periods, so it is important to be aware of the process of defaulting on a second mortgage loan.

If, after buying a 2^nd home, an owner defaults on his second mortgage, what happens next is not always straightforward. If the default occurs with a first mortgage, a lender will usually foreclose on the property to recoup losses.

This is the same whether the owner has two mortgages or just one. When the owner defaults on a junior lien (second mortgage), however, whether or not a lender forecloses on the second home depends on its value.

If, after buying a second home with a second mortgage, the property in question has increased in value, this is known as equity.

Equity means that the lender is likely to foreclose, as the foreclosure sale will help them to get back some or all of the money lost on the default. If it has decreased in value, this is known as the property being “underwater.”

The mortgage is now worth more than the property itself. Lenders will not gain any of their money back by foreclosing, and so are unlikely to do so.

Even in this circumstance, however, second mortgage foreclosure could still result in the owner of the property facing a lawsuit from the lender. Lenders may do this in an effort to recoup their losses.

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Buying a Second Home—Conclusions

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There is no question that buying a second property is a big responsibility for anyone. Important questions need to be considered: Can I get a second mortgage? What exactly is a second mortgage, and what might it mean for my finances? Am I really ready for the financial burdens of buying a 2^nd home?

Despite some claims to the contrary, buying a second house is not accessible for most people due to the considerable financial hurdles. Many experts recommend against attempting it at all unless the buyer intends to become a professional real estate developer. Such are the difficulties associated with the industry.

If a prospective buyer finds herself with the resources to buy a vacation home for her family, this is a simpler (if more expensive) option than investing in a rental property.

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