Second home versus investment property: Mortgage rates and rules

A recent survey by the National Association of Real Estate Agents (NAR) showed that the second domestic market is much larger than previously suspected. Actually, 36% of all homes bought last year were second homes. While just 13% were vacation homes, even more, surprising 23% of them were investment homes. But many of those who own vacation homes also own investment properties, and second homes are often third, fourth, or even fourteenth homes for serious investors.

Financing your investment property

Of course, this raises the questions of “Should I get a fixed-rate mortgage or an adjustable-rate mortgage?” and “Where do I receive the money for the down payment?” If you don’t have the money to pay for a second home but have equity in your primary residence or other property, you can use it to buy your investment property through a second mortgage or a home equity loan and to refinance your current mortgage.

If you haven’t taken benefit of the lower rates as you bought your primary residence, mortgage financing is something to consider right away while the rates remain low even if you’re not looking for an investment. There are several options for securing a down payment and financing a second home. If you have the equity and your credit is good, one will certainly work for you. You only need to do research to find the best way to invest and be sure that you will be able to pay your payments.Read more

Down payments

If you are buying investment properties, you will need a down payment of a minimum of 10%. When you don’t have the cash on hand, refinancing or a second mortgage or a home equity loan on your primary residence can get you the money you need. The home equity is the fair market value of the property less the amount you owe on the mortgage. This amount can be available to you through a home equity line of credit (HELOC) or a home equity loan.

Refinancing mortgages to “withdraw cash” or extract net worth is another way to put your home equity to work. Certainly, the better your credit, the better the rate on your mortgage refinance or second mortgage. You will need to decide which type of mortgage makes the most sense for your situation once you have settled the down payment on your investment property.

Choosing a mortgage

There are advantages to having a second mortgage even if you have the money to pay for your investment. The main advantages are that interest payments as well as points are tax-deductible. Owning can be one of the best tax breaks you can obtain. The other advantage is that your cash is free to use elsewhere.

If you plan on flipping the property and sell it within the next 7 years, an adjustable-rate mortgage can be a good decision, otherwise, you are betting on interest rates. But these loans provide a lower monthly mortgage payment and can allow buyers to be eligible for a larger loan. Adjustable-rate mortgages provide lower interest rates since they are tied to short-term interest rates.

A fixed-rate mortgage provides you more security, but it can mean higher payments. A fixed-rate mortgage will give you peace of mind even if you plan to keep the property indefinitely. Your monthly mortgage payment won’t modify and may be included in your budget. A fixed-rate mortgage can make sense whether you can rent the property at a rental rate of at least 1% of the property’s value to avoid negative cash flow. You are in an even better long-term position if the property is certain to appreciate.