Introduction
If you’re considering buying a house while owning another house, you may wonder if it’s possible to get financing.
The answer is yes!
There are several different options available to help make this feat possible. But before we dive into exactly how these loans work (I prefer the home equity loan or home equity line of credit), let me explain the reasons why homeowners might want another house in the first place.
If these reasons sound familiar, or if you have questions about whether owning two properties is right for your finances, read on.
Why do you want another house
It’s not easy to answer that question because there can be so many reasons. Maybe you’re looking for an escape from the city. Or you want a place where you can host friends or family. Maybe you just love the idea of having a cozy cabin in the woods where you can spend all your spare time Reading, writing, or drawing.
Whatever your reason may be, it’s important to understand the reason behind your desire for a second home. If it’s just about relaxation and recharging, renting out your place on Airbnb may be enough. If being part of a community is your goal, buying a timeshare may be better suited.
Can I buy another house if I own one?
If you’ve got your first home already, it’s time to talk to a mortgage lender to see what your options are. The lender will look at your financial history and debt-to-income ratio to ensure you have enough income for two mortgage payments.
Can I use my house as collateral to buy another house?
Bridge loans are commonly used when you don’t have enough cash to buy a new house and want to use the equity in your existing home. But there are things to consider with these types of loans:
- Bridge loans are riskier; therefore, interest rates are higher than traditional mortgages.
The closing costs may be higher because of the larger loan amount, so shopping around for the best rate and terms when arranging bridge financing is important.
A bridge loan can only be used when you buy another property within 90 days (or 180 days if using an FHA mortgage).
Is it harder to buy a second house?
Buying a second home is generally very similar to buying your first. You’ll need to hire a real estate agent, find a lender, get pre-approved for a mortgage, and find the house you want to buy.
You need to know that lenders will want to see more of your financial history when applying for a mortgage than they would with your first home. They’ll also want proof that you can handle debt and make payments on time before approving a loan for another property.
Make sure you have at least two years of bank statements and tax returns showing consistent income and no late payments on any bills before applying for credit.
Figure out how you’ll finance the new home
To purchase a home, you’ll need to have enough money for your down payment and closing costs, plus enough cash to pay the difference between your current mortgage payment and your new one. You can consider using a HELOC or a cash-out refinance as a few options.
If this is all new to you, it can be confusing. You may not know how much money you can afford each month or what kind of mortgage would work best for your situation.
Talk with an expert to help you determine how many properties fit into your budget before committing.
What are the tax benefits of owning a second home?
You’ll still have to pay taxes on the property. Second homes are assessed at market value, which usually means a higher rate than a primary residence.
However, owning a second home has many tax benefits. The IRS (Topic no. 415) considers a second home to be one you use for personal purposes, not as an investment property. You can deduct mortgage interest, property taxes, repairs and maintenance, insurance premiums, utilities, and depreciation if these expenses exceed 2% of your adjusted gross income. You can also deduct any losses on the Sale of the property so long as they are not related to personal use or improvements.
If you rent out your second home for more than fourteen days per year, it’s considered by the IRS to be a rental property and not a second home anymore—and you, therefore, have to pay self-employment tax on any income derived from the rental activity. This is because when you rent out your second home for over fourteen days per year, it becomes an investment property rather than just a place where you hang out with friends and family once in a while.
Weigh the risks and rewards of buying a second home
When deciding whether it’s right for you to buy an additional home, it’s important to weigh the risks and rewards.
Before you make an offer on a second home, consider how owning multiple residences will affect your finances.
On the plus side, owning multiple properties can help diversify your portfolio and improve its overall value over time. It can provide tax savings or other benefits to help you move up in the world (or at least out of that small apartment 🙂).
The biggest Downside is that buying a second property is expensive—especially if it’s out-of-state and costly to travel to. You might need to sell one or both of your current homes before purchasing a third one. This could mean selling them for less than what they’re worth if you’re trying to sell quickly.
Most Common Funding Options
What is a home equity line of credit?
A home equity line of credit is a loan that allows you to borrow against the equity in your home. If you have $100,000 in equity in your home and want to borrow $50,000, you’ll be able to do so by using a home equity line of credit.
Home equity lines are typically used for expenses that don’t require monthly payments, like renovations or College tuition. You can also use a home equity line to consolidate debt into one loan.
Home equity lines are only available if you own your home and have paid off at least 20% of the mortgage balance.
What is a cash-out refinance?
A cash-out refinance is when you take a new mortgage on the home you’re already living in and get paid in cash. You can use it for anything, from paying off student loans to buying a new car or renovating your kitchen.
To cash out refinance, you’ll need to have enough equity in your home to cover the amount you want to borrow.
A cash-out refinance is also called a second mortgage (because it’s essentially a second loan on top of your first). It’s used by homeowners who have equity in their homes and want to use that equity to pay off other debts or invest in something else.
The process is pretty simple: You take out a new mortgage with a bank and make monthly payments on it.
You can get a cash-out refinance even if your credit score isn’t perfect, although it will affect your rate and the amount of money you can borrow.
What is a bridge loan?
A bridge loan is a short-term loan that can help you buy another house while still owning your current one. It allows buyers to quickly move from one house to another without the necessary cash or liquid assets.
Bridge loans are not for everyone, however.
They’re typically only available to people with good credit scores (typically above 700).
They can be expensive since they require both a down payment and interest payments over time. These loans also come with higher interest rates than traditional mortgages do.
A bridge loan may be helpful if you don’t qualify for other home loans!
Takeaways
In conclusion, buying another home while you own one can significantly diversify your investments and increase your financial stability. However, it’s essential to consider all the factors involved before making the leap.
If you’re still unsure whether a bridge loan or HELOC or cash-out refinance is right for you, talk to a mortgage professional.
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