Have you done well with the equity in your home in the last year or two? You may be thinking about buying a second home so you can live in a different city, state, or even country. It’s estimated there were about 7.5 million second homes in the US as of 2016, or about 6% of the total number of houses, according to the National Association of Home Builders.
The most popular places for a second home are Florida, New York, California, Texas, Michigan, Arizona and North Carolina.
If you’re thinking about buying a second home, here are some of the benefits to consider:
- It can be an investment: Whether you decide to rent it a few times per year or use it as a full-time rental property, having a second home can give you nice passive cash flow. If the property rises in value over the years, you also can sell it at a profit down the road.
- You may get tax breaks: If you pay mortgage interest and taxes on your home and second home, you may be able to qualify for more tax breaks. If it’s an investment property, you may enjoy other tax benefits.
- Makes vacationing simpler: Are you always trying to determine where you’ll spend your vacation? With a second home in a desirable location, you always have a place to go! For example, if you have a vacation home on the beach in Florida, you can probably go more if you have a place of your own vs. a hotel
- Use it retirement: Who dreams of retiring at the beach or mountains? You can eventually sell your primary residence and retire in your second home.
How To Finance Your Second Home
There are many ways to finance a second home, but how do you do it for the lowest rate and cost? Many financial experts say you should finance your second home with equity from your first home’s mortgage.
Home equity is the largest asset that most American families have, and it lets you borrow money at some of the lowest interest rates around.
Your home backs the mortgage, so you can get low rates for a variety of loan products.
Some of the best options for low interest rates for your second home are:
Home Equity Line Of Credit (HELOC)
A home equity line of credit or HELOC is a second mortgage that lets you take out up to 80% of the home’s value when you want. It works like a credit card, but your home equity up to a certain amount is your credit line.
A HELOC is a good choice to finance a second home because it has a low, variable interest rate during the draw period of five to 10 years. It can be taken out and repaid as you like.
You may be able to get a HELOC is 2021 for a 4% or lower interest rate, which is a great deal for putting down a large down payment on a second home.
Remember that the rate on a HELOC can vary, so if you want more certainty, you may opt for a home equity line.
Home Equity Line
This second mortgage also allows you to borrow money against the equity in your first residence. If you want to buy a second home, you can get some of your equity in one lump sum payment, so it could be a good option for a second home down payment or even to buy it outright.
A major plus for many homeowners is you can rely on a fixed interest rate in the 4% or 5% range in 2021. It will probably be higher than a HELOC rate, but it’s fixed and you know what you will be paying for years to come.
Another option is to do a cash-out refinance on your first home’s mortgage to secure a lower interest rate and pull-out cash. This can be a great idea if your interest rate is higher than current rates.
Note that your mortgage balance and payment for your first mortgage will probably rise when you pull out money to buy your second home.
You also can pull money out of your retirement to buy your second home. It’s essentially interest free money because you’re paying yourself back with interest.
A reverse mortgage can be a good option to finance your second home affordably, but it only works for people who are at least 62.
A reverse mortgage lets you borrow cash from your paid-for residence without repaying until you sell the home. This can be a good option for the older borrower who wants to keep their savings when they buy another home.
But there are downsides to a reverse mortgage. The interest on the loan will continue to grow if you don’t make payments. If you die and the reverse mortgage is still in place, your children or heirs must pay it off to keep the house.
Otherwise, they’ll probably have to sell your residence to pay off the balance of the reverse mortgage.
Tax Matters With Home Equity For Second Home
There still are some tax advantages to taking out equity, but things changed somewhat with the 2018 tax law.
You can deduct the interest on your second mortgage on your primary residence if it is used to improve the home. So, you cannot take the money out of your first home and finance the second and deduct the interest.
You only can take the money out of a home and tax deduct the interest if the money is used for home improvements on the home it secures.
Last, you still may need to get a mortgage to pay for your second home. If you do that, you can expect your interest rate to be about .5% higher than for your first home.
Your interest rate also will depend on your credit rating, income, location, and the market. Note that you or your family will need to live in it part-time to get a mortgage for a second home; the rules vary by lender.
You can get a second mortgage and have a home away from home with some of the low interest rate ideas above, so what are you waiting for?