Should I Finance a 2nd Home with a Second Mortgage or Refinance?

In a recent report, the National Association of Realtors highlighted that 40% of homes and condos purchased nationwide last year were acquired by individuals investing in second homes. NAR President Thomas M. Stevens remarked, “What we see now is a crossover between largely vacation and investment-home owners, with people recognizing the value of those investments and pouring more assets into real estate.”

Given the growing trend of consumers investing in property, you might be contemplating the idea of acquiring a second home or vacation property. The question arises: How do you secure financing for such a venture? Many borrowers today use a HELOC with an investment property or second home.

How to Get Approved for 2nd Home Loan with a Refinance or Second Mortgage

As property values ascend, many individuals discover that they have accrued equity in their current homes. Notably, 28% of investors with a mortgage for an investment property utilized their primary residences to obtain funds for the down payment, and you could explore a similar avenue. Opting for an equity home loan or 2nd mortgage to fund home improvements and further enhance equity is a commendable strategy.

Taking it a step further, you can leverage this approach to secure a down payment for a second home. Borrowers should contemplate adding a second mortgage if they require cash to initiate construction on their vacation home or to invest in additional properties. This article was written by Rebecca O’Connor.

 

Should I Finance a Vacation Home with a Home Equity Loan or Cash-Out Refinance?

Purchasing a vacation home can be a dream come true, offering a getaway spot for your family or even a potential source of rental income. However, financing that dream often requires careful consideration of your options. Two popular methods for financing a vacation home are using a home equity loan or opting for a cash-out refinance. Each has its advantages and drawbacks, and the best choice depends on your financial goals and current situation. Here’s a breakdown to help you decide which option is right for you.

What Is a Home Equity Loan?

A home equity loan allows you to borrow against the equity in your primary residence. Equity is the difference between your home’s market value and the outstanding balance on your mortgage. With a home equity loan, you receive a lump sum of money, which you repay in fixed monthly payments over a set period, typically with a fixed interest rate.

What Is a Cash-Out Refinance?

A cash-out refinance mortgage replaces your existing mortgage with a new one, allowing you to borrow more than your current mortgage balance. The difference between the new mortgage amount and what you owe on your home is provided to you in cash, which can be used to finance your vacation home. Unlike a home equity loan, a cash-out refinance consolidates your mortgage into one loan with a single monthly payment.

Pros of a Home Equity Loan

1. Fixed Interest Rates: Most home equity loans come with fixed interest rates, making your monthly payments predictable and stable over time. This is ideal for borrowers who prefer consistent payments without worrying about market fluctuations.
2. Keep Your Existing Mortgage: With a home equity loan, your current mortgage remains unchanged. You simply take out a second loan secured by your home’s equity, which can be beneficial if you already have a favorable interest rate on your primary mortgage.
3. Separate Loans: A home equity loan allows you to keep the financing for your primary residence and vacation home separate, which can simplify financial planning and budgeting.

Pros of a Cash-Out Refinance

1. Potentially Lower Interest Rates: A cash-out refinance may offer lower interest rates than a home equity loan, especially if you originally locked in your mortgage when rates were higher. This can save you money in the long term by lowering the interest paid on both your primary mortgage and the additional funds for the vacation home.
2. One Monthly Payment: Instead of managing two separate loans, a cash-out refinance consolidates your mortgage into a single payment. This can simplify your finances and make budgeting easier.
3. Larger Loan Amounts: Depending on your home’s value and equity, a cash-out refinance may allow you to access a larger loan amount compared to a home equity loan, giving you more flexibility in financing your vacation home.

Which Loan Makes the Most Sense for You?

• Home Equity Loan: A home equity loan is a good choice if you prefer keeping your current mortgage terms and want a separate, predictable loan for your vacation home. It’s also ideal if you’re nearing the end of your mortgage term and don’t want to reset the clock with a new loan.
• Cash-Out Refinance: If interest rates have dropped since you took out your original mortgage, a cash-out refinance could save you money by lowering your overall interest rate. It’s also beneficial if you need a larger loan amount and prefer having a single monthly payment.

Both a second mortgage and cash-out refinancing can help you finance your vacation home, but the best option depends on your financial situation, current mortgage terms, and long-term goals. Carefully consider the pros and cons of each to determine which aligns with your needs and offers the most financial benefit. BD Nationwide can help connect you with multiple mortgage specialists that provide personalized guidance and offers to help you make the right decision.