Are you in the market for a second home? Whether you’re planning to use it for a vacation home or rental property, you’ll likely need to take out a second mortgage to make the purchase. However, the down payment requirements for a second mortgage aren’t the same as what you’ll find for most mortgages on primary residences.
Keep reading to learn more about how down payments work for second homes and how to get the funds you need without draining your bank account.
Access Your Home Equity
How Much Down Payment Do You Need to Buy a Second Home?
Most lenders require a downpayment of at least 10 percent on a second home. This is slightly higher than the minimum payment requirement for both conventional and government-backed loans and there is a valid reason.
These mortgages are far riskier for the lender since the chance of default is higher. Consequently, the lender will generally require a higher credit score and could be more stringent with the debt-to-income ratio requirements to minimize the chances of default. Furthermore, the lender wants reassurance that the buyer has the means to make timely monthly mortgage payments.
Ways to Get the Down Payment for a Second Home
Even if you’re not sitting on a pile of cash, it’s possible to come up with a down payment for a second home. Here are some options to consider:
Tap Into Your Home Equity
You can take out a home equity loan or home equity line of credit (HELOC) to make a down payment on your second home. A home equity loan acts as a second mortgage and lets you borrow up to 85 percent of your home’s value, minus the amount owed on the mortgage and any other liens against the property. You’ll get a lump sum of cash at closing and make equal monthly installment payments over an extended period.
To illustrate, assume your home is worth $625,000 and you’ve paid the mortgage down to $375,000. You could qualify for a home equity loan of up to $156,250 ($625,000 * .85 – $375,000).
Access Your Home Equity
In contrast to a home equity loan, a HELOC is a revolving line of credit that works like a credit card. You can borrow for an as-needed period during the draw period of up to 10 years, but you’ll make interest-only payments. However, when the draw period ends, you’ll make principal and interest payments that could fluctuate over time since the interest rate is variable.
But if you’d prefer a debt-free alternative to a home equity loan or HELOC, a co-investment from Unison could be more ideal. You could get up to 17.5 percent of your home’s equity in cash today for a share in a portion of your home’s future increase or decrease in value. All the while, you remain the sole homeowner; Unison does not share ownership of the home. There are no monthly debt payments, and you’ll have 30 years to use the funds however you see fit before you have to sell the home or buy out the agreement.
Even better, you can get an estimate in minutes without impacting your credit score. Consider visiting Unison online to see how much money you can access from your home equity. You’ll only need to answer a few simple questions, and there is no obligation to move forward if you decide a co-investment is not a good fit for you.
Get a Cash-Out Refinance Mortgage
A cash-out refinance also lets you pull up to 80 percent of the equity out of your home if you have good or excellent credit. To illustrate, assume your home is worth $375,000 and you owe $225,000 on the mortgage. If the lender approves you for a cash-out refinance, you’ll get $75,000 ($375,000 * .80 – $225,000) in cash and a new mortgage for $300,000 ($225,000 + $75,000). Furthermore, the new lender will pay off the old loan, and you’ll commence repayment on the new one.
Get a Personal Loan
You could qualify for a personal loan with competitive terms if you have good or excellent credit and a steady income. Upon approval, the lender may send your funds as soon as the next business day. Still, these loans are a bit risky since they generally come with short repayment terms between three and five years. So, your monthly payments could be steep and stretch your budget way too thin, depending on how much you borrow.
Borrow from Friends and Family
If you have relatives or friends in good financial health, they may be willing to loan you the funds needed to make a down payment on a second home. However, be mindful that you could risk your relationship(s) if you fail to draw an agreement that’s reasonable and works for both parties and follow through with your end of the deal.
