How to use the second home calculatorUse the second home calculator by plugging your known income and monthly expenses into the appropriate fields. To get an accurate idea of how much home you can afford, be as exact as possible with your current financial status. Some terms to be familiar with include:
- Employment income: This is the amount of money you receive from your primary job each month before taxes are withdrawn.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.
- Debt-to-income ratio (DTI): This is found by dividing your monthly bills by your gross monthly income. The lower your DTI, the more favorable you will be seen by lenders.
- Cash on hand: This is the amount of money you have leftover each month after deducting recurring expenses.
- 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.
- 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.
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, this loan allows you to borrow against the current equity you have in your home. It provides 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.
- 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 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. 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. Pursuing co-ownership, however, can make up for shortcomings in your financial status and get you into the second home of your dreams. For instance, interest rates through Pacaso’s financing partner typically range from 3.5% to 5%. That’s lower than the industry norm and one less hurdle to jump over. For a limited time, Pacaso is also offering 3.95% financing on eligible homes until Dec. 31, 2022.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.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 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 the riskiness of the loan.
- Improve your credit score. 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 DTI exceeds 43%, focus on paying off some of your debts or finding ways to increase your income. This can produce immediate results, and you won’t have to wait for credit watchdogs to report on your status.
- Reduce unnecessary spending. Small, individual expenses like eating out add up fast. If you’re struggling to save for a down payment, look for affordable alternatives to your current habits.