With today’s interest rates, and the relatively healthy state of the housing market, many people have decided that buying a second home is a good investment. One of the investment strategies being employed by these people is to use a second mortgage to buy that second home.
Although the prospect sounds like a good idea, you should plan carefully before you take on such an investment. For one thing, there is some significant risk involved because if you do take on a second mortgage you must ensure that you have the ability to pay for it should your financial situation worsen.
Using a second mortgage to use as either a down payment to buy a second home or even to finance the purchase means that you cannot default on it and are as responsible for making your payments on the second mortgage as much as you are responsible for paying for your primary one. If you default on a second mortgage you could end up losing your home in a foreclosure proceeding.
Having said that, you should also be aware that mortgage lenders tend to be more restrictive when it comes to using a second mortgage to buy a second home. You can expect to pay higher interest rates on a second mortgage than what you are paying for your first mortgage.
You will also have to follow all the procedures in applying for a second mortgage that you went through to get your first mortgage. This means you will have to update all your information so that it is current and will need to have a healthy credit repost.
There are also different restriction and limitations depending on the second home you want to buy. The equity you have built in your house must be a minimum amount such as around 15% and you can only borrow up to a certain percentage of the total amount of equity such as 85%, and not the full 100%. This amount may vary from lender to lender.
Lenders may also require a somewhat larger than expected down payment as well which can be as high as 25%.
Also, different types of second homes are classified in different ways and the different classifications entail different lending requirements.
If you don’t have the required down payment you will have to get mortgage insurance with agencies such as Canada Mortgage and Housing Corporation (CMHC) or Genworth. Seasonal cottages and cabins are treated quite differently than a home which can be occupied year round. Also, properties which are to be used as rentals are also treated differently and follow different restrictions.
The market value of the home can also impact how the lender and CMHC will view your mortgage application, and may have additional restrictions if the home has a certain ceiling value.
So, it is vital that a person who is thinking of getting a second mortgage do some serious research on what they might encounter when using a second mortgage to buy a second home. You must also remember that the purchase of a second home will entail all the assorted closing costs which you must also be sure is included in your budget.
Photo by jwthompson
