Multiple Mortgages: What You Need To Know
There are a variety of different reasons you might find yourself shopping for an additional mortgage. Owning more than one property can open up new possibilities whether you’re interested in investing in some real estate, finding the perfect home away from home, or even closing on a new house before you’ve sold your current home. As a homeowner, you’ve already experienced the mortgage process, but applying for, and managing, a second loan will likely be a little different and come with it’s own challenges and benefits.
Investment properties
If you’re looking to get into the real estate investment game, there’re a few different ways to go about it. One is to own multiple properties and rent them out. The other way is to flip properties — which isn’t as easy as is often shown on TV, and definitely not the best long-term investment. Aside from purchasing a property for the sole purpose of renting or flipping for profit, you can also buy a new home to live in and keep your previous house as a rental property.
Benefits of buying an investment property
One big benefit of owning an investment property is that it can help keep your debt-to-income ratio low. This ratio is one of the factors that lenders use to calculate your qualifications for mortgages. Aside from lenders, banks might take a look at this as an asset during your pre-qualification of credit cards, etc. If a higher percentage of your income is taken up by debt payments, it can make it harder for you to qualify. A profitable investment property can help alleviate that. Once you begin to collect rental payments from a tenant, you can put those funds towards the mortgage on that investment property. Rental properties can also give you tax benefits, because they’re taxed differently than your primary residence. You might be able to deduct a number of different costs, like homeowner association fees, maintenance costs, and more.
Disadvantages of buying an investment property
Different kinds of mortgages usually have different qualification requirements and some can only be used to finance a home if you actually plan to live there. Mortgages for rental properties usually have stricter requirements, which can make qualifying more difficult. Aside from qualification requirements, like any investment, real estate doesn’t come without risks. The market is constantly changing and there’s a chance your property could be vacant for months at a time if the market dies down.
Keep an eye on your local housing market, especially if you plan to use the investment income to cover a mortgage or maintenance costs.
Always be conscious of the fact that you’re a landlord and have responsibilities to fulfill with investment properties. If something happens in the home and needs to be fixed, it’s your responsibility to manage maintenance issues and costs associated with them. Another thing to consider is if you ever plan to move, taking care of a home long distance is difficult. This helps bring us to the next point.
Vacation homes
If you’ve found yourself in the middle of a perfect vacation, wishing it would never end, you wouldn’t be the first. One way to capture that magic and keep it on tap is to buy a vacation home at your favorite destination. The good news is that it’s more doable than it may appear, but it also comes with it’s disadvantages that are worth considering before making that leap of a second mortgage.
Benefits of buying a vacation house
Perhaps the most obvious advantage of buying a vacation property is that you can spend your holidays in the comfort of your own home away from home. But that’s just the beginning. You can also put your house to work and earn some extra income by renting to other vacationers during weeks that you don’t plan to use your slice of paradise.
A vacation home can offer the perfect combination of fun and functionality.
The right property can also give you a jump-start on planning your retirement. You can choose a location or climate that works best for you and start establishing a home that you can easily transition to when you retire.
Disadvantages of buying a vacation house
Just like with investment properties, mortgages for vacation homes are a little different. Since it probably won’t be your primary residence, the mortgage for your bungalow, cabin, or whatever it might be, will probably have steep requirements, like higher down payments or higher interest rates. Also keep in mind that insuring a vacation home is not the same as insuring a primary residence or investment property. Since vacation homes are usually empty for most of the year, many insurance companies consider them to be a bigger risk, which can lead to high costs for you.
Transitioning between homes
Selling your home usually means that you’re in the market for a new one, but balancing two sales can be tricky. The real estate market is constantly on the move and if your home isn’t selling as quickly as you had thought, you could miss out on the perfect purchase. One way to solve this timing problem is to take out a mortgage on your new home before you’ve sold your old one.
Benefits of buying before selling
If you purchase your new home before selling your old one, it can take some of the guesswork out of your moving schedule. You can transition at your own pace and won’t have to worry about timing closing dates to an exact moment. >Using a second mortgage to transition between homes allows you call the shots on moving. This strategy also gives you added flexibility. If the market isn’t performing how you’d like, you can choose to advertise for renters and use the profits to cover the mortgage while you wait for the market to turn. If you have enough equity in your first home, you may be able to combine both mortgages. This might give you a higher interest rate, but can consolidate, and potentially lower, your monthly payment.
Disadvantages of buying before selling
One of the biggest factors to consider before you take on a second mortgage is the amount of debt you already carry. It’s important to have enough equity in your first home, or available income, to balance the new debt. Without the right ratio of debt-to-income it can be more difficult to qualify. Keeping both properties can make it harder to make a clean break from your old home. You’ll still need to attract a homebuyer, which means maintaining both the interior and exterior of the property. If you choose to rent it out, you’ll also be responsible for maintenance, rent collection, and any other issues that might pop up. And selling your old home from a distance also has it’s difficulties. You would need to be present to make any necessary changes to the home, and ensure the home is up to date to sell. Having a real estate agent there during the transition will help significantly. Taking on an additional mortgage is a big step, but it doesn’t have to be overwhelming or confusing. For help and guidance, contact your mortgage banker.