Learn About Purchasing a Second Home

By: Lee Bell
Submitted: 2008-08-20 18:01:24
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Many people choose to purchase a second or "vacation" home for cooler summers or warmer winters. The process will be similar to when you bought your first home. Your lender will ask you for the same type of paperwork that you had to give when you bought your primary residence and you will go through a similar "house-hunting" process. When you are ready to buy that second home that you have been hoping for, there are just a few differences between a primary home and a secondary or vacation home that you should be cognizant of.

Recognize a Lender's Interpretation of a Second Home

Your lender will want to go through a validation process to officially identify your prospective purchase as a second home. The first thing that your lender will look at is whether or not your second home is smaller than your primary residence. Your lender will consider not only the square footage of the home but also the price as compared to your primary residence. The next thing that the lender will look at is the distance between the primary and the secondary homes. Your two properties must be at least 100 miles away from each other. If you meet these two criteria, then your new purchase can be classified as a second home for lending and IRS purposes.

For many people, their second home does not meet both of these requirements. However, the down payment amount for a second home that does not get official second home status from a lender is not that much more than that of a primary home. If your home does get second home status for lending purposes, you can anticipate your required down payment amount to be slightly less. Without this status, however, your down payment amount will still be very reasonable. The down payment for your second home could be as low as between five to ten percent. As with every mortgage, the more money you can put down the lower your interest rates and monthly mortgage payments will be.

You Should ask Your Lender About Variance Between Financing Options

When buying a second home, you have the same availability in loan products as when you finance a primary home. However, you might want to research options for financing. Discuss your long-term and short-term plans with your lender. If you plan on keeping your second home for the long haul, a fixed rate loan would suit you best. On the other hand, you might consider this home a shorter termed investment that you will sell in a few years. If this is the case, an adjustable rate mortgage, or even a balloon could be considered. These loans could get you into a home with a much lower rate than a fixed, and thus save you money.

Gather Information About Second Home Purchases

Your interest rate can be the same as your primary home, in many cases. Many mortgage lenders offer second home buyers the same rate and down payment as on a primary home. Some things in a buyer's financial history, however, can lead to a very slight increase in the mortgage rate. In most cases, this increase will only be one-eighth of a percent over the going interest rate, but the increase does rarely go over one-fourth of a percent higher than for a primary residence. To figure out how much these increase will affect your payments, use a mortgage calculator and add a fourth of a percent (just to be safe) to the advertised mortgage interest rate and factor a five percent down payment. That will give you an idea of how much this variance will affect your mortgage payments.

If you are curious, you can use the going interest rate when considering possible payments. Use a mortgage calculator and figure in at least 5% down payment. Use the advertised interest rate, add a quarter percent to be safe, and play with the figures. Make sure and take the interest paid per year into consideration. Everyone can use another tax deduction. If it is in your budget and would improve your quality of life, why wait? 

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