Whether you want to buy a second home as a vacation property or as an investment property, getting a loan can present challenges. The mortgage market adopted stricter lending guidelines after the financial crisis that started in 2007, although lenders are loosening some of those restrictions in some areas. But second properties pose a greater risk than a primary residence. If you already own a home, however, it can serve as a financial resource to help fund a second home purchase.
TL;DR (Too Long; Didn't Read)
You can borrow money on your home to buy a second home if it has built-up equity.
The equity you have in your home is the total value of your home minus any liens against the property. If you have a home recently appraised at a value of $100,000, for example, and you do not have a mortgage or a lien against the property, you have $100,000 — or 100 percent — equity. If you have a home worth $100,000 but you have a $40,000 mortgage and a $10,000 lien for unpaid property taxes, then you only have $50,000 in equity.
When you are looking to take money out of your primary home to purchase another, you may take out a new primary mortgage. If your home is paid off, you get cash for the equity in your home by using the house as collateral against a first mortgage note.
You may cash out 90 percent to 100 percent of the home's equity, depending on the lender. Even if you already maintain a mortgage on your home, you might consider a cash-out refinance. This allows you to refinance the existing mortgage, perhaps even at a lower rate, and increase the loan balance to take advantage of some of the home's equity.
If conditions are such that you do not wish to alter the terms of your primary mortgage, consider taking out a second mortgage. Providing you have adequate equity after deducting the first lien to your primary mortgage holder, you typically may obtain a second mortgage for the remaining equity up to 90 percent or more. Ask for a check for the mortgage proceeds, deposit the funds into your bank account, and make an offer on the second property.
The HELOC Option
A HELOC, or home equity line of credit, functions much like a second mortgage. You can get cash up to the available equity in your home, and the lien is secondary, or subordinate, to the lien of the primary mortgage holder.
A HELOC also has features similar to a credit card, because you may request a revolving line of credit linked to your home's equity. You may borrow up to the total available, pay it down over time, and then borrow more against the newly available credit. The Federal Reserve Board makes an important point, however, that failure to repay a HELOC or second mortgage note subjects you to the risk of losing your house.
Sara Melone is a mother of three and a graduate of UNH. With prior careers in insurance and finance, photography, as well as certifications in fitness and nutrition, Melone draws directly from past experience and varying interests. She contributes with equal passion to birth journals, investment blogs, and self-help websites.