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What are the hidden expenses in a second home?When shopping for your ideal second home, it can be tempting to focus only on a property’s list price and monthly mortgage payments. However, owning a second home comes with other financial responsibilities. Crunch those numbers, too, before you look into financing. Budget for:
- Home furnishings and essentials: Essentials like furniture, towels, bedding, dishes and other items make your new house feel like a home.
- Homeowners insurance: Most mortgage companies will roll your homeowners insurance into your mortgage, but if you’re choosing to finance a second home with a product other than a traditional mortgage, you’ll have to plan for insurance costs in addition to your monthly loan payment.
- Property taxes: Just like homeowners insurance, a mortgage often rolls taxes into your monthly payment. If you go a different financing route, you may need to pay property taxes separately.
- Utilities: Estimate the cost of heat, electricity, internet service and water for your second home.
- Maintenance and upkeep: You will need enough cash reserves to cover the costs of repairs and home maintenance. Don’t forget about lawn care and snow removal as well.
- HOA dues: Community amenities can be a big plus for a second home, but you may need to pay a monthly homeowners association fee to access them.
What are your options for financing a second home?The good news: Any of these options can be combined to help you pay for a second home.
- Take out a conventional mortgage loan. This is a good choice if you have limited assets and you don’t want to take equity out of your primary residence, but (as noted above) it has more limitations than a conventional mortgage.
- Use cash to buy all or part of your second home. Paying cash allows you to enjoy your second home mortgage-free. Or use cash for your down payment, reducing the amount you have to finance and achieve instant equity in your new home.
- Take out a home equity line of credit (HELOC). Use the equity you have in your current home to open a revolving line of credit to pay for part – or all – of your second home. Because a HELOC uses your primary residence as security, it typically carries a lower variable interest rate. Keep in mind that your credit score might be lowered by accessing large amounts of equity.
- Take out a home equity loan. Like a HELOC, a home equity loan draws on the equity in your primary home to finance your second home. Unlike a HELOC, you'll get a fixed interest rate and the you receive the whole amount in one payout. You’ll repay the loan in monthly installments just like a conventional mortgage.
- Do a cash-out refinance. This also taps the equity in your primary residence by refinancing your mortgage for more than the remaining principal amount, and using the extra cash to finance your second home. This is a good option if interest rates are lower than what you’re currently paying on your mortgage. Keep in mind that your monthly mortgage payments will be for the higher loan amount and you’ll be starting your payoff journey over.
How does financing a second home differ from a first mortgage?Once you’ve calculated the costs and you know how much you’re ready to spend for your second home, it’s time to think about financing. Your first thought might be a traditional mortgage – after all, that’s probably how you financed your first home. However, while a mortgage for a second home has all the same elements as a traditional first mortgage – credit score checks, a down payment and closing costs – these elements don’t always play by the same rules when it comes to financing a second home. Here are a few things to know about financing your second home with a mortgage:
- Loan limitations: FHA and VA loans are great for first home mortgages, but these products are only for primary residences and can’t be used to purchase a second home.
- Larger down payment: Many first mortgages only require a minimum of 3% down, but down payments on second homes can be 10% or higher, depending on your credit score.
- Higher credit score requirements: Expect to see a minimum credit score requirement of 640 or more when looking at qualifications for second home borrowers. But remember: The higher your down payment, the lower your credit score can be.
- Higher interest rates: Lending institutions consider second home loans higher risk because if you experience financial difficulties, you’re more likely to prioritize payment of your primary home’s mortgage. Expect higher interest rates on a second home loan.