About Second Home Mortgages
Financing your second home is a little different
than financing your primary home. Here is some general information
on second home financing as well as information very specific
to Sullivan County to help you successfully finance your purchase
here.
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What are the differences between financing
a primary and a second home?
Ratios. Lenders determine how much they're willing
to lend you based on a ratio of your housing expenses
to your total income. Typically that number ranges from 28
to 35%. Housing expenses include your mortgage payment, taxes,
insurance, and in the case of a condominium or private community,
any homeowners dues. (Housing expense, for their calculations,
does not include utilities.) For a second home mortgage, the
lender includes the housing expenses for your primary
residence together with the projected expenses for your second
home to calculate your ratios. Whether you rent or own your
primary residence, if your monthly expense on your primary
home is, say, $2,000, and your housing expense for your second
home is $2,000, to a lender your total monthly home
expense is $4,000. If the lender requires that your total
housing expense be no more than 32% of your gross income,
you would need a monthly income of $12,500 ($4,000 / .32)
to qualify for a mortgage on your second home if the
total expense (what's called PITI, or Principal, Interest,
Taxes and Insurance) for that home is $2,000 per month.
Its not really that complicated when you get the hang of it.
But online mortgage calculators and sites that provide
mortgage preapprovals, like e-loan, generally do not have
the capability to take primary home expenses into account
when calculating affordability of a second home. The only
way you're going to get an accurate calculation and preapproval
is by talking to a mortgage lender.
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How much down payment do I need for a second
home?
Second home buyers typically put 20% or more down. However,
I have had clients who have successfully financed a second
home with 10% or even as little as 5% down. However, lenders
apply stricter underwriting criteria on lower down payment
loans, and may not be willing to finance a property that has
larger acreage, is more unique or needs repairs with a 5%
or 10% down payment.
- Can I use a mortgage lender in the city or one of those
online mortgage brokers?
I strongly recommend against it! Lending on country property
is different than lending on city or suburban property. Particularly
in Sullivan County, where we have so few sales in any given
year, it can be difficult finding "comps" (similar
houses that have sold within the last 12 months) within an acceptable
distance for a "city" underwriter. Citibank and Chase,
for example, are notorious for not underwriting loans here.
Neither has a local representative who is familiar with Sullivan
County and can go to bat for your loan. This doesn't mean, however,
that you have to use a local bank. A number of large national
lenders, like Wells Fargo, HSBC and Sun Trust, have local representatives
and can offer you their bank's full loan portfolios and
act as your local advocate through the loan process.
"Out of area" lenders may also order your property
appraisal from a large appraisal company not based here, and
not familiar with the Sullivan County real estate market. I
had a client who was purchasing a unique lakefront home here.
He went with an out of area lender, who sent an appraiser up
from Westchester. The appraiser was totally unfamiliar with
lakefront properties in Sullivan County. The appraisal was way
off. The buyer ended up hiring a second local appraiser, and
that appraisal was accepted by the lender. But the buyer had
to shell out another $325 for that second appraisal.
Finally, its important that your mortgage lender can close on
the loan IN Sullivan County. Some out of area lenders will require
that the closing take place at their office or representative
in Orange County or as far away as Westchester County. If your
closing doesn't take place in Sullivan County, you will
pay for your attorney, the seller's attorney, and the representative
of the title company to travel to the closing location out of
the county — and that can be a pretty expensive proposition.
- How do I find a local mortgage lender?
I provide my clients with a list of mortgage lenders I recommend.
Note that in New York it is illegal for real estate brokers
to receive kick backs or referral fees, so anyone I recommend
is someone who I think is good, and not because they are paying
me to say they're good.
- Are mortgage rates higher for a second home?
Mortgage rates for a second home used to be higher than for
a primary home, but that's changed, as the lenders have become
incredibly competitive. Particularly if you're putting 20% or
more down, you shouldn't be much of a spread. Mortgage rates
are based on risk, and if you have a substantial down payment
and your credit is very good, there shouldn't be any difference.
However, if your credit is marginal, the risk to a lender is
greater on a second versus primary home, and you may see a small
difference.
- Is mortgage interest deductible on a second home?
Generally yes, although you need to speak with your financial
advisor to confirm this, as IRS rules do change. The
IRS permits a mortgage interest deduction for one primary and
one second home. However, there are maximums and limitations
(which generally only impact purchasers of more expensive properties.)
Note: the mortgage interest deduction only applies
to residences; if you take out a loan to purchase
raw land, without a habitable structure on it, you cannot deduct
the mortgage interest!
- What about my rate lock?
Mortgage lenders offer various rate lock periods, guaranteeing
your mortgage rate for 30, 45, or 60 days. In the city or suburbs,
a sale can typically close in 30 to 45 days. In Sullivan County,
the closing process takes much longer for a number of reasons.
The quickest I see a closing involving a mortgage is about 45
days from an offer acceptance, and 60 to 90 days is more common.
Given the long closing period here, one of the strategic decisions
I'll help you make is when to lock your mortgage rate and for
how long.
- We found a house we love, but don't quite qualify for it.
What should we do?
Most buyers get pre-approved for a traditional 30 year mortgage
with a fixed interest rate. This type of mortgage, which your
parents probably used to buy their first house on Long Island,
offers you the most security — your payment will never
go up over the term of the loan. But its also the most expensive
type of mortgage. A lender is going to charge you a higher rate
to agree to lend you the money at that rate for 30 years.
Even with mortgage rates at historic lows, adjustable rate mortgages
can be very attractive options. Adjustable rate mortgages (ARMs)
have come a long way since they were introduced 20 years ago.
An adjustable rate mortgage, which has a lower initial interest
rate and therefore lower monthly payments, cna help you qualify
for a larger loan. An ARM also makes sense if you don't think
you'll own the house for 20 or 30 years. Very few home owners
actually stay in their home for 30 years, paying out the entire
mortgage — but they've paid a premium for those 30 years
of rate assurance.
There are adjustable loans I like, and adjustable loans I'd
steer clear of:
Adjustable Loans to Avoid
"Balloon" mortgages. These have a low interest rate,
possibly even fixed, for 7 years, and then at the end of 7 years
the principal is due in what's called a "balloon"
payment. Most people refinance the mortgage at that point to
make the balloon payment. But if your situation changes, e.g.
you're temporarily unemployed, and can't qualify for a new mortgage,
you may not be able to make the balloon payment and you can
lose the house.
Variable Rate / Fixed Payment Mortgages. Ah, the security of
a payment that will never change is attractive, right? When
the interest rate rises, and the payment doesn't, the lender
adds the extra interest back into the principal of the loan.
This is also known as a "negative amoritization" loan,
where the principal balance can actually increase over
time. Of course, you can make higher payments to keep the balance
from increasing, and if you're disciplined enough to do that,
this can be a very attractive loan.
Adjustable Loans to Consider
5/1 or 7/1 ARMS. These loans have a fixed rate for 5 or 7 years,
and then the rate is adjusted according to a pre-determined
index. Look for 5/1 and 7/1 ARMS that have a maximum yearly
adjustment, as well as a maximum rate cap. Some of these ARMs
can also be converted to a conventional fixed rate mortgage
at some point in the future.
"Interest Only" LIBOR Loans. This is a relatively
new product. These are generally 20 to 30 year loans, but for
the first 7 or 10 years you pay only interest; no portion of
your payment goes to pay down the principal. At the 7 or 10
year point, the loan begins to amortize the principal for the
remaining period of the loan. This is not a balloon loan.
You don't have to pay off the principal or refinance at the
7 or 10 year point. This is a pretty sophisticated loan, and
you should discuss the pros and cons of it with your financial
advisor.
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