How to use the second home calculatorThis easy-to-use calculator breaks the number-crunching down into a few steps. Simply plug in details about your monthly income and debt obligations, then continue on to determine how much you can afford. The calculator is only as accurate as the numbers you put in, so try to be as exact as possible with your current financial status. Let’s walk through the steps:
Step 1On the first screen, you’ll input some of your financial data to calculate your monthly debt-to-income ratio. As you do, here are the figures you’ll be asked to enter:
- Employment income: This is the amount of money you receive from your primary job each month before taxes are withdrawn.
- Supplemental income: Add any money outside of your primary income that you can reliably depend on from month to month. Rental income is a common form of supplemental money, as are investment earnings, child support and alimony.
- Current monthly mortgage payment: This is how much you spend every month on the mortgage for your primary residence. For an accurate representation of your monthly costs, you’ll want to include property taxes and homeowners insurance — not just the principal and interest portions of your mortgage payment.
- Monthly housing expenses: Enter how much you spend each month on other household-related costs, like utilities and maintenance.
- Monthly debt payments: Total up other monthly payments that go toward debt obligations. This includes things like car payments, credit cards, home equity loans or student loans.
Co-owned second homes
Step 2On this screen, you’ll see your current debt-to-income ratio (DTI). A commonly used term in real estate lending, DTI is calculated by dividing your monthly debt obligations by your gross monthly income. The lower your DTI, the more favorable you will be seen by lenders. This screen also shows you your estimated cash on hand. This is the amount of money you have left over each month after deducting recurring expenses.
Step 3This step helps you figure out how much you can afford to spend on a second home. You’ll be asked to input the following information:
- Second home down payment: This is the amount of money you’re willing to pay upfront for the home. A larger down payment (20% or more) usually results in a lower interest rate.
- Second home mortgage interest rate: This is the rate of interest charged by your lender. You’ll want to do some quick research on current interest rates. Note that interest rates on second homes tend to be a bit higher than on primary residences.
- Mortgage loan length: This is the number of years it will take to pay off your loan. The longer the loan, the higher the interest rate.
Step 4Here, you’ll see your results. Based on all your inputs, you’ll see how much you can afford to spend on a second home. If you’d like to explore Pacaso second homes, you can simply click “View listings” and check out the homes that are available within your budget. Now that you’ve done the math, let’s explore how you can make second home ownership work for you.
5 factors to consider when buying a second homeSince lenders make money off of interest rates, they are incentivized to offer the highest amount possible to a home buyer. Just because you may qualify for a large loan doesn’t mean it’s in your best interest to accept it in full. Remember that in addition to monthly mortgage payments, second home owners are still responsible for:
- Annual property taxes
- Homeowners insurance
- Utility payments
- Possible homeowners association fees
- Regular maintenance
1. Know your financing optionsKnowing how you plan on paying for your home will help determine what you will be approved for. Here are some of the common routes home buyers take:
- Home equity loan: Also known as a second mortgage, home equity loans allow you to borrow against the current equity you have in your home. They provide a lump sum of cash or line of credit for you to make a purchase. If your property loses value, you may owe more on the loan than the property is worth.
- Conventional loan: You can receive these loans through traditional lenders like banks and credit unions. Just like your primary mortgage, you’ll make monthly payments of principal and interest until your loan is paid off.
- Cash: Paying for a home in full will reduce the overall cost of owning a second home because you won’t be paying interest on a loan.
2. Revisit your current financial statusLenders want assurance that you will be able to uphold the terms of your loan, so they’ll look at your current financial situation. Typically, you will need to have a favorable credit score, as anything below 640 could result in a rejected application. How much of your income goes to paying off debts is another important factor. Qualified mortgages have a maximum debt-to-income ratio (DTI) of 43%, but many lenders set their own limit below this amount to curtail risks.Your DTI is important because if a large portion of your income is dedicated to paying off debts (including your primary mortgage), even a small reduction in your income can bring your budget underwater.
3. Understand second home mortgage requirementsThe second home buying process is similar to buying a primary home, but it does have stricter requirements. Along with having higher interest rates — usually 0.5% to 1% higher — second home mortgages usually require larger down payments, too. This is due to the greater financial burden a vacation home places on the owner. The rule of thumb is that your housing and debt payments should add up to 36% of your pre-tax income at most. Sticking to this guideline can prevent you from being “house poor,” which means tying the majority of your income up in housing expenses and leaving little cash on hand for unexpected expenses, either related to your second home or not.Be prepared to pay at least 10% of the second home’s value as a down payment. This is substantially higher than the rate for a primary mortgage due to the added loan risk.
4. Know your options for second home ownershipGetting a second home mortgage may be out of reach if your goal is to become the sole owner, but that’s not your only option. Pursuing co-ownership can make up for shortcomings in your financial status and get you into the second home of your dreams. Purchasing your home through a co-ownership model like Pacaso can also provide many benefits that you’d miss out on with traditional methods. For the price of a mid-tier home, for example, you can have a share in a luxury home with all the benefits that come with it, like top-of-the-line amenities, high-end furnishings and a prime location. You’ll simply share ownership with up to seven other owners as part of a multi-member LLC.Pacaso manages the property for you, ensuring it’s flawlessly maintained and stocked with the essentials you need for a relaxing stay. This sort of turnkey ownership allows you to bypass the common hassles — and big price tag — of owning a whole second home.
5. Learn how to increase your borrowing powerAfter evaluating your finances, you may find that you don’t meet the requirements for purchasing a second home at the moment. The good news is that you have the power to increase your appeal to lenders with just a little time and strategy.
- Offer a larger down payment. Your current income may be fixed for the time being, but if you have enough savings, you can pay a greater percentage of the house price in cash. This will reduce your monthly payment and make your loan less risky to lenders, which may give you access to a lower interest rate.
- Improve your credit score. Higher credit scores mean lower interest rates, keeping more money in your pocket every month. Paying debts on time has the biggest impact on your score, but utilizing 30% or less of your credit line also plays a big role. Or you can try consolidating your debts so that you’re only dealing with a single payment that might have a lower interest rate.
- Improve your DTI. If your current debt-to-income ratio exceeds 43%, focus on paying off some of your debts or finding ways to increase your income, or both.
- Reduce unnecessary spending. Small, individual expenses like eating out add up fast. What small (or not-so-small) luxuries are you willing to forgo in order to secure your second home? If you’re struggling to save for a down payment, take a look at your everyday spending habits and see where you can cut back or find more affordable alternatives.