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Thinking About Buying a Second Home?
Friday, May 27, 2011
The strongest motivator when we buy houses is stability and the real estate market knows this. When we buy houses for other reasons, the odds are, unfortunately, a little stacked against us. Making the choice, given adequate financial stability and proper planning, to purchase a second home requires that a prospective purchaser take the time to understand exactly how the market changes in respect to their previous home purchase. The obstacles available for a second home buyer, while not immense, are real, and require that they be understood.
The first and largest obstacle to overcome is quit simply, income. Maintaining adequate cash flow and reserves is vital to being able to purchase a second home. Always be prepared before you even walk into the lender's office to pay at least 32% of the home's principle payment up front, while some lender's require only 20% to begin a mortgage, others require more, and 32% has been shown to be the median initial payment. Once you're capable of paying this amount, it is a good idea to speak to your loan officer and discuss possible monthly payments, in order to facilitate the opening of a savings account that will be used in the case of emergencies. This savings account should allow for a 6 month cushion on mortgage payments, insurance, and the like, in case any issue should arise and payments cannot be made. Consider it an escrow against losing your second home.
Maintaining adequate cash is impossible, however, if one also choose to maintain high amounts of debt. Debt should be as clear as possible before a second home should be attempted, if for no other reason than it reduces the chances that a lender will process a second mortgage. A good rule of thumb is to calculate all current monthly payments in a yearly amount, to make sure that debts are not any higher than 36% of current income. If they are, then clear some debt before saving for the down payment and emergency fund.
Lastly, a quick review of perils to avoid when buying a second home. Be sure to never borrow against the equity of your primary residence, as, even with an emergency fund, any failure to maintain payments would lead to the loss of both homes. Borrowing against equity also displays a need for increased cash flow, which should be the first thing accomplished. Finally, be sure to continue to maintain debt below the 36% threshold. Borrowing over this amount can easily lead to a lack of necessary funds when any emergency comes up, or insurance premiums rise.