Top 5 Alternatives to Fund Your Second Property

Real Estateby Mashum Mollah20 May 2021

Alternatives to Fund Your Second Property

When it comes to first homes, things are pretty straightforward. You get a mortgage, you buy your home, you move in, and you start paying.

However, things get rather difficult when you are planning on buying a second property. The rules at that point become much stricter. There are additional expenses to consider, particularly if one of the homes is going to be turned into an investment property.

With that in mind, now that you have your first property, you can’t get financing through the regular methods anymore. This means that you need to find some alternatives for financing the business. Here are some good alternatives that you might want to consider.

1. Home Equity Financing:

Home equity financing is one of the most popular ways to finance the purchase of a second home, as it often gives you large amounts of cash at a relatively low interest rate. With home equity, the qualification is also much easier as compared to a standard mortgage, as the lenders no longer care how the proceeds are being used after they have been disbursed.

Usually, home equity proceeds are seen as cash given during a home purchase. This can be very convenient for you, particularly if you are trying to quickly close the deal. However, bear in mind that home equity financing comes in two different forms:

  • Home Equity Loans: The most popular option, these loans allow you to borrow against the equity that you have already gathered in your home. These loans are instalments and are paid on a monthly basis until the money is back in your home equity:
  • Home Equity Line of Credit (HELOC): Similar to credit cards, HELOCs are a great alternative if you are looking for a quick and flexible alternative to make a down payment. Bear in mind that it’s never recommended to take out the whole line, as it can affect your credit utilization ratio and put a black spot on your credit score.

The choice that you make depends on the urgency and your possibilities. For example, some prefer the low interest rates of a regular home equity loan whereas others prefer the flexibility and constant availability of HELOC.

One thing that you’ll have to remember is that as of the tax law of 2018, tax implications have also changed. If you will use the property as a second home, then property taxes and mortgage interest could be deducted. However, if you rent the property out – say, as a vacation home – then you won’t be able to deduct the interest on the equity loan.

2. Reverse Mortgage:

2. Reverse Mortgage:

You might no longer be able to get a regular mortgage, but you can still get a reverse mortgage. With that in mind, reverse mortgages can only be seen as viable alternatives if you are past 62 years of age. These government-sponsored loans allow you to borrow money against your home, and you won’t have to repay the money until you sell the house.

This option is a very good one for those who are buying a second property for relocation purposes. This way, they can buy their new dream house, sell their old home and move without any complicated loans. It’s similar to a second mortgage, about which you can read more here.

Bear in mind that interest might still gather, and even if you have a reverse mortgage outstanding, you’ll eventually have to start making payments. If you don’t make those payments, then you will practically pass on the debt to your descendants, and they’ll be the ones forced to pay the debt in your stead.

3. 401(k) Loan:

While not everyone likes to borrow from their retirement funds, it can still be a good alternative when you need some quick funding. With these loans, you are practically borrowing from yourself. They are also an interest-free alternative, as any interest that you “owe” will go straight into your retirement account.

Bear in mind that once you tap into your 401(k) fund, you’ll be disrupting the interest that had been accumulated. The money that you leave in that account will gather interest – so, when the funds will no longer be in that account, it’s obvious that they’ll not be able to gather interest.

4. Cash-Out Refinancing:

Cash-out refinancing is a good option if you need a loan to finance your second property. Basically, you’ll be refinancing your money for a bigger sum than you owe, keeping the cash difference. It’s a good option if the current mortgage rates are much lower in comparison to the rates you’ve been paying up until this point.

Bear in mind that there is a chance that your monthly payments may increase. You’ll also increase the timeframe of the loan repayment, as you now have a bigger balance to repay. As a borrower thatsecon is going for a cash-out refinance, you need to make peace with the fact that you are practically resetting the clock for your previous loan – the only difference being that you’ll have a different interest rate.

5. Loan Assumption:

Sometimes, you may be able to assume a loan of a previous lender who already has a mortgage on the property. Let’s say that they just bought the property themselves and they only paid about 2 years out of a 20-year mortgage.

At that point, rather than looking for a new mortgage yourself, you can simply assume their mortgage. You’ll still have to pay the difference that they paid for already, particularly if they are quite advanced with the payments. However, if you are lucky enough to find a previous owner with low interest rates on their loan, then you have found yourself a convenient second property purchase.

The Bottom Line:

There are several alternatives for you to finance your second property, all of which are quite convenient. The one you choose will depend entirely on your possibilities. Some find it easier to tap into their own equity, whereas others are lucky enough to assume an old loan. It all depends on your circumstances and needs.

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Mashum Mollah

Mashum Mollah is the man behind TheDailyNotes. He loves sharing his experiences on popular sites- Mashum Mollah, etc.

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