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Financing Second Homes & Investment Properties

Whether it's a vacation getaway, rental property, or retirement home, you have a few different options when it comes to financing a second home.

If you have equity in your existing home, you might want to use it to pay for the new property. Depending on how much equity you have, you could come up with the down payment or pay for the new property outright. If you're buying a rental home, your existing equity could provide a reserve account for maintenance and repair of the new property.

The advantages to this strategy are that interest rates on primary residences are typically lower than for second homes or investment properties, and come with fewer conditions. You'll also be able to continue making just one monthly payment, assuming you don't have to take out another loan for the property.

On the downside, if your new loan exceeds more than 80% of the value of your current home, you may have to pay Private Mortgage Insurance (PMI). Also, with the new tax laws, you may not be able to deduct your interest payments.1

The difference here is that you would use an equity loan rather than a first mortgage. This option can work well when using the funds as a reserve account for the new property by opening a Home Equity Line of Credit (HELOC). A HELOC lets you use your equity as you need it, rather than taking a lump sum all at once.

The advantages of using an equity loan or HELOC are shorter repayment terms, typically 10 -15 years, instead of the 20 - 30 years of a first mortgage. You can usually access more of your home's value through an equity loan than you can from a first mortgage. Often you can use up to 100% of your equity as an equity loan without having to worry about PMI. Equity loans usually close faster and have fewer closing costs than first mortgages.

Disadvantages of this strategy include the shorter payment term, which means your payments will be higher than they would with a first mortgage. As with a refinance, you likely won't be able to deduct your interest payments.1 If you have a first mortgage on your primary residence, you'll be making at least two payments each month.

The third strategy is to use the new property as the collateral for its own loan. You'd likely go this route if you don't have a primary residence or don't have a lot of equity in your existing home, or if you are only using your existing equity to make the down payment. You may also choose this direction if you want to keep the financing for each property separate.

The benefits of this strategy are that you won't be using your primary residence to secure this loan. This can be important if you're buying a rental property, as you may be able to use expected rental income to qualify for the loan.1

Drawbacks include higher down payment and income requirements, higher rates (especially if it will be a rental), and different requirements for second homes and investment properties, such as needing to maintain a reserve account for repairs. In addition, you won't be able to take advantage of certain government backed mortgage programs, like FHA or VA, for these types of properties.

Purchasing a second home can be an important part of preparing for the future, whether you're using it to grow your income, as a place to spend your golden years, or simply a place to get away. Knowing your options can allow you to tailor your financing plan to your unique situation. If you have questions or want to start building a plan, it's important to talk to a qualified loan officer, like those at Seattle Credit Union.

They can help you understand your options and will work with you to find the strategy that's best for you. To get in touch, call us at 206.398.5888.

1Seattle Credit Union is not a tax advisor and does not provide tax advice. Consult a licensed tax advisor for guidance for your individual situation.

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