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Buying a second home is exciting, but coming up with the down payment can be daunting. But with one home purchase already under your belt, you’re in a stronger financial position now than you were when you bought your first home, and there are a variety of options for the down payment for a second home.
How much do I need for a down payment on a second home?
The down payment for a first home can be as low as 0% and as high as 20%. But you should expect to need at least 10% down for your second home, and sometimes more than 20%.
The amount you’ll need for a down payment for a second home depends on several factors, including your credit score, your debt-to-income ratio (DTI), and the cost and type of property you’re purchasing. Down payments and interest rates can also vary depending on the lender, so it’s a good idea to shop around.
Here is a closer look at how these factors can affect your down payment:
- Credit score: The higher your credit score, the less money lenders will require for a down payment on a second home.
- Debt-to-income ratio: A lower DTI can often mean a lower down payment for your second home.
- Type of property: A second home classified as an investment property will require a higher down payment than one classified as a vacation home.
- Cost of property: Financing a less expensive property is a lower risk for a lender, so it will require less money down.
- Interest rate: The more money you’re able to put down on your second home, the lower your interest rate will be.
What sources of funding should I consider for a down payment on a second home?
A down payment for a second home can be as simple as accessing funds from a bank account or as creative as combining sources of funding, including the equity you’ve built in your primary residence or selling other assets.
To help you determine how to best fund the down payment for your second home, here are the pros and cons of using different sources for your down payment.
1. Bank account
Pros: Money in a bank account is easy to access and transfer. Using it for your down payment won’t add to your debt load.
Cons: Second homes come with added expenses, and spending too much cash on a down payment can reduce the amount you have on hand for things like home maintenance and furnishings.
2. Investment account
Pros: Like bank accounts, money in investment accounts is easy to access, and using it will not affect your credit score. If your second home increases in value over time, you may even see a return on your investment.
Cons: The real estate market can be riskier than something like a money market account, so there’s less certainty of a return on your investment.
3. Sale of an asset
Pros: Valuable assets (like real estate) often come with additional physical and financial responsibility. If you’re buying a second home, selling an asset to fund your down payment can simplify your financial situation.
Cons: Lenders often consider assets when evaluating your finances, and they may be less likely to give you favorable terms if you don’t have solid assets for collateral.
4. Retirement account withdrawal or loan
Pros: If you have plenty of time before you retire, there’s very little risk involved with using your retirement fund for a down payment for a second home.
Cons: When you take money from your retirement fund, you face penalties, fees and taxes on the money you withdraw, making it an expensive financing option.
5. Home equity loan or HELOC
Pros: Home equity loans and home equity lines of credit (HELOC) typically come with low interest rates and large loan amounts.
Cons: Borrowing against your home can affect your credit score and DTI, which can lower your chances of getting financing for a second home. It also puts your primary residence in jeopardy if you can’t repay the loan.
6. Combine any of the above
Pros: Not getting all your funding from one source can protect your credit score and DTI, and ensure you have enough cash on hand for emergencies.
Cons: Any of the drawbacks above may still apply, but with a lesser impact on your financial situation.
How to reduce the down payment on a second home
One of the best ways to lower the out-of-pocket expense for a down payment on a second home is by reducing how much you’re paying for the home. But that doesn’t necessarily mean sacrificing square footage, quality or location.
Pacaso’s LLC co-ownership model allows you to own ⅛ to ½ interest in a beautiful, spacious second home in a prime vacation destination, giving you full ownership rights without the full price tag. Pacaso also offers a variety of financing options to help you achieve your dream of second home ownership.