Second Home Financing Strategies

A second home, such as a beach house, makes for great weekend getaways.
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You're comfortable in your house but you'd like to have a getaway place. Maybe you want a second home in your favorite ski area or a place near the beach or on a fishing lake. Work with a real estate agent in your chosen area to find something you like within your price range. Set a price limit so your payments for both houses won't be more than 28 percent of your gross monthly income or your payments for all debts, including credit cards, will be less than 36 percent of your income.

Use Your Equity

Consider using the equity in your primary home to buy a second or vacation home. For example, if your house is valued at $400,000 and you owe $100,000, you have $300,000 of equity you can use. You can get a second mortgage on your house or apply for a line of credit and use the proceeds to buy the second home. You'll be able to deduct all the interest on your income taxes.

Get Another Mortgage

You can get a mortgage on your second home. This usually will require a down payment of about 20 percent of the loan and usually will have a higher interest rate than your primary home. Apply for a mortgage where the second home is located. A local lender may be more amenable than one in your hometown who doesn't know the market in the location of your second home. You'll be able to deduct this mortgage interest, too.

Borrow Against Other Assets

Borrow against your life insurance or an Individual Retirement Account. This may be an acceptable option if your second home is not too expensive and you can pay it off with a short-term loan. It is not a good idea to borrow against insurance or savings on a long-term loan. It may work better for young people with a lot of investment savings already built up.

Try Lease-Purchase

Look for some lease-purchase option in a resort or vacation area. Some property owners in resort areas will work out private arrangements to lease a home with an option to buy or with some part of the monthly or yearly lease going toward eventual purchase. The purchase is generally made in three years or less after you start leasing the house.

Make an Investment

If you think you can rent a second home for part of the year, think about forming a limited liability company, or LLC, to buy it as an investment. You will still have to make the payments, but the mortgage will be in the name of the LLC, and you can use the rent to help cover the payments. This won't change your tax status because income and expenses of an LLC pass through to the owner, you. You'll still be able to deduct mortgage interest but will have to report rental income.

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