Getting a mortgage on a second home is a step that many homeowners take to obtain a vacation home in another location. Depending on the region, this vacation home can be rented out throughout the year, and can thus be a worthy investment.
But you have a lot on your plate with your current home management, and it may be overwhelming to think about making another mortgage payment on top of home maintenance expenses that pop up throughout the year, such as air conditioning repair.
Fortunately, you have options. For current homeowners, it’s possible to take advantage of the equity already built up with the first home. Here’s how to use your home’s equity to purchase a vacation home.
How to Access Your Home Equity
So, you know that you’re building equity after you buy a home. But how do you actually access this equity?
Your first option is to take out a home equity loan. This gives you a lump sum with a fixed interest rate. So, in addition to your monthly mortgage payment, you have the home equity loan payment to make each month with this option.
Another option is a home equity line of credit. This is a line of credit from which you can withdraw money as needed, and it will typically have a lower interest rate than a home equity loan, but it’s usually a variable interest rate. This kind of credit line is often used by homeowners to pay for a big expense like a home remodel, but it’s also a good option when trying to get a second mortgage on a vacation home.
Your third option is cash-out refinancing, which gives you a new mortgage on your current home, and any equity you have built up can be withdrawn in cash. This is beneficial if you don’t want to have two monthly payments, as you would with a loan or line of credit. However, you may not want to refinance if the current mortgage terms are beneficial for your financial situation.
Accumulating equity in your current home means you can use that money however you’d like, including investing it back into a vacation home. These three options have their own sets of pros and cons to consider based on whether or not you want a second monthly loan payment or if you’d prefer to refinance the mortgage.
Make Sure Using Equity is the Right Option
Before you use your equity to buy a vacation home, there are a few things to keep in mind. Asking yourself these questions will get you started:
- Do you have other assets you could put toward the home, like cash in a savings account or retirement plan assets?
- Are you prepared to use all of your equity or just a portion of it?
- Can you rent out your vacation home, and if so, how much rental income do you foresee the new property earning?
- How much room do you have in your budget for a second monthly payment, on top of a second mortgage payment?
- What is your current credit score? This number could impact your ability to get a home equity loan, a line of credit or even a cash-out refinance.
- What is your current household income?
- Are there any big expenses coming up for your current home?
Thinking through these points will help you figure out what you can afford and the best option for getting your dream vacation home, no matter your location.
Maintaining your current home requires lots of upkeep, and big expenses may arise as a regular part of homeownership. Whether you’re in need of air conditioning repair in Colorado Springs or air conditioning repair in Spokane, Washington, make sure you research your local options to find the best contractor.