Escrow Rules for Second Home Loans

You've lived in your house for a time and have adjusted to its monthly payments, even putting a bit aside. Now you'd like to get a cabin in the mountains or a place near the beach for a weekend retreat or a vacation home. You realize that will require another mortgage on the new property. You might finance it with an additional loan on your present home, but be cautious about that; if you replace that with a mortgage later, you might lose its interest deduction. Be prepared for escrow charges on your second home loan.

Like a First Mortgage

Getting a mortgage on a second home, whether it's a rental or a vacation spot, is much like getting your first home loan. You must prove you're able to handle the payments for both first and second home loans. That means having all your existing loan payments, including escrow, current. You probably will have to put down at least 20 percent of the cost.

Conventional Mortgage

You probably will get a conventional mortgage, as opposed to a government-secured loan, for a second home. Conventional loans from banks and other lenders have higher interest rates and require bigger down payments. You'll need at least a 620 credit score and enough income to pay mortgage interest, taxes and insurance and all other debt with less than 36 percent of your monthly income..

Tax and Insurance Escrow

Expect to have to create an escrow account to reserve money for annual real estate taxes and insurance on the second home unless you put a larger amount down or can demonstrate that you can pay tax and insurance bills yourself. Escrows collect monthly payments to accumulate funds for these expenses to protect the lender against loss in case of a loan default.

Two Escrows

You generally will have two escrow amounts when closing or finalizing the second home mortgage. One will be included as part of the closing cost, to pay taxes and insurance between the time you close the loan and the next annual bill. You can't eliminate this, but sometimes you can wrap it into the loan total. A second escrow will be the monthly payment, 1/12 the annual tax and insurance. This will be added to your monthly mortgage bill.

Waiver

You may be able to waive monthly escrow on a conventional loan if you can demonstrate enough income to guarantee payment of annual taxes and insurance. This is at the lender's discretion. A lender can refuse to waive these escrow charges if she's not satisfied with your assurances of paying them separately. The larger the down payment, the greater the likelihood you can get this waiver.

About the Author

Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.