A second home is only a dream for most Americans, but with the right planning, financial situation, and lender, it could be a reality for you and your family. According to NAHB estimates, there are more than 7.5 million secondary homes in the United States, and about 5.5% of all homes in the US are second homes. The most popular hot spot for second homes is Florida, and more than 14% of all second homes are in the state. If you’re considering looking for a second home, understand that loan requirements are stricter, rates are higher, and loans are more difficult to secure. If you can meet lenders’ requirements, you too can buy a second home in a beautiful, relaxing location.
A Note About Inflation and Interest Rates
Recent dramatic interest rate hikes by the Federal Reserve are necessary to slow the rate of inflation. However, these hikes translate to higher costs over time for buying a home as well as higher payments each month. Every incremental change in the federal interest rate causes shock waves in all areas of the economy, including the real estate and mortgage sectors, and the interest rate has gone up 1.5% in total since this year. The housing market is cooling as a result of these changes.
Most of the homes built in the last 2 years in America are worth more than $450,000 and a record-breaking 8% of homes in the United States are now worth more than $1,000,000. While the affordable housing issue carries on, there’s an abundance of beautiful second homes to choose from in nearly any market in the country.
Requirements for Primary VS Secondary Mortgages
A second home is a luxury, and it’s usually the first thing to go when times get tough economically. Lending institutions naturally find that funding the purchase of a second home is riskier than a first home. Banks are naturally fiscally conservative and risk-averse, and the riskier the venture, the harder they make it to access second mortgages.
Banks charge borrowers more for a second home mortgage in the form of increased interest rates. Down payments on a first home might only be 3-5%, but with a second mortgage, it’s at least 10%. Your credit must be in excellent shape, cash reserves must be high and your debt-to-income ratio at a maximum of 36-43%. These mortgage products also usually come with stricter penalties for late payments. If you want to buy a second home, not only will you need a significant down-payment, low debt, high income, and excellent credit, but you’ll also need 3-6 months’ worth of expenses saved up and an emergency fund. Those expenses should include funds to pay your second mortgage.
Current Interest Rates for Secondary Mortgages
Rates fluctuate depending on the loan terms. The least expensive product is a 15-year fixed-rate mortgage starting at 5.125%. With a 30-year fixed-rate mortgage comes an interest rate starting at 6.5%. Qualified second homes that aren’t used as rental properties and meet federal requirements come with the benefit of providing federally tax-deductible state property taxes. You can deduct property taxes up to $10,000. These mortgages are also totally refinanceable if the loan rates drop in the future.
If you’re ready to find out more about second mortgages and if you qualify, a Potempa Team member is here to answer all your questions and help you find out if you qualify.