Are you thinking of buying a second home? You don't have to be super rich in order to own two houses. While some people want to buy a second house to add to their list of properties-like a vacation home, some people want to buy as an investment property either by fixing it up and sell or by renting it out.
But, you have to consider that buying a second home may mean taking out another mortgage. There are people who can manage it, but there are those who just don't have the ability. If you're thinking of buying a second home for profitable reasons, consider these things first.
1. Huge money reserves. You don't need to be a millionaire to buy a second home but you need to have a lot of cash. If you're not planning on selling your first home, the bank has to see that you have enough money to cover at least six months of mortgage payments, aside from the down payment. And as a general rule, you have to pay a higher downpayment than the amount you paid for your first home, usually about 20% or more.
2. Lesser debt. When you take on a second mortgage, you're taking on more debt. Lenders put a huge weight on debt to income ratio and you should keep this in mind when applying for a second loan. In most cases, the ideal debt ratio is between 36% to 42%. So all your debt, including credit card debt, car loan, student loan and mortgages, should fall within that ideal ratio. However, if you're planning to rent out the second home to offset your debt, you should inform your lender because having additional income lowers the risk of getting rejected by the lenders.
3. Higher rates. It isn't just the deposit that's higher when it comes to buying a second home. The monthly mortgage is also higher compared to your first home. Banks often view real estate investor as riskier customers that's why second-time buyers are usually subjected to higher rates.
Remember that buying a second home is more than just insurance, taxes and mortgages. Take into account all the expenses, including maintenance and bills, to make sure that you don't regret your second purchase.
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