YOU'RE FEELING FLUSH
The answer depends on which type of mortgage is right for you. Here are your options: Getting a single mortgage for your second home; refinancing your mortgage on your first home to cover the costs for both homes; using a home-equity loan to make a down payment on the second property. Or you could simply decide to pay cash upfront. But with the current stock market climate, wouldn?t you prefer to keep your money out and about?
A Mortgage for Your Second Home
The problem with getting another mortgage is that lenders will not give you as attractive a rate because they know your income will be stretched thinner. The result is that second home rates run 1/4 to 1/2 of a point higher than for primary residences. But with such a competitive real estate market and low interest rates, that shouldn?t stop you, says Peter G. Miller, author of The Mortgage Hunter, and many other real estate books. Miller suggests the 15-year fixed mortgage rate as an ideal mortgage for a second home. "It will give you a substantial interest savings, and it?s a way to clear out this new debt pretty quickly," he says. "And it will give you more cash flow, especially if the first house is paid for and the kids are out of the house."
Refinancing/Combining Your Mortgage
This option is for those unlucky people who are still saddled with a first home mortgage. Remember, since rates right now are probably significantly lower than they were when you may have gotten the initial loan, says Miller, you can refinance your loan so it includes the new costs for the second home at a much lower rate. "This could save you a lot of money over the long term," he reasons.
Using a Home-Equity Loan
This method -- which allows you to take out a home-equity line of credit on your primary residence to fund all or part of your second home purchase -- is popular with lenders because they can often bump up their lending rates a point or two above the prime rate. "Lenders are making these much more appealing by cutting closing costs out of the loan," says Joe Carter, a real estate writer with This Old House. "And the ones who haven?t are fools."
Miller says these loans favor people who have an enormous amount of home equity in their first home. "It helps you pay off existing debt on the first house and you can then use the excess money to buy the second house." Plus, $100,000 of the loan?s interest is deductible and it?s easier to qualify because the loan is against the first home.
The downside of home-equity loans is that you are normally allowed to deduct up to $1 million in debt. And, unlike with refinancing, you will probably be paying a higher rate. "I don?t favor home equity lines of credit because, even though you get the cash upfront, you end up paying this debt at a higher rate," says Carter.
With the current market, Miller believes that you should refinance that first home mortgage and combine it with a loan for a second home under a 15-year fixed rate. This will not only give you a lower rate of interest on your (now larger) loan, but it will also be much lower than a home-equity loan. And over a 15-year period, one or two percentage points make a world of difference. Check out our worksheet to find out just how much you would save.