Becoming a Second Home Buyer May be Easier Than You Think

Buying a second home is much more affordable than most people think.

by Debbie Dahmen

July 1, 2004

Many people have the desire to own a second home, and yet feel this may be out of their reach. Fact is, it could be easier than you think. Second homes aren't only for the rich. For many, they have become mainstream. Whether they're used for vacations or for rental income more than 9 million dwellings in this country are second or third homes, accounting for about 6% of residential sales. 3/4 are considered vacation homes and the rest are investment properties or undeveloped land, according to a 2002 survey by the National Association of Realtors.

Where Do You Find the Money for a Down Payment?

You don't have to have a pile of cash on hand to buy that second house. You can use the equity in your primary residence to help pay for a second (or third) home. Prior to moving forward be sure you explain to your lender what you're doing. You will also want to consult with a tax advisor. This will assure as smooth a process as possible.

There are so many variables, a primary one being how much equity you have in your current home. You want to be armed with information on what the benefits of pulling out equity in your existing home vs. borrowing is. It always comes down to the cheapest cost of borrowing.

It's not always easy to identify the least expensive cost of borrowing. That's why communication is so important. The lender needs to know which house will be your primary residence and which will be secondary. In most cases, you will find that the interest rate on an owner-occupied home will be about 3/8 of a percentage point lower than for a non-owner occupied house. This reason alone gives you more motivation to get as large of a loan as possible on your primary residence because it's the cheapest cost of borrowed money.

Understanding Your Resistance

Many borrowers resist this line of reasoning because they want to build equity in the home they live in. Although it seems instinctually like the smart thing to do equity is equity. It doesn't matter which house it's in. If you have a lot of equity in your primary residence and you want to buy a vacation home, it might make sense to refinance the mortgage on the primary home for more than the current loan balance. This is called a 'cash out refi'. How it works is you borrow more than the current balance, pay off the current loan and get the remainder in cash. You can use the cash extracted from your primary homes equity to make a down payment on your second home, or even to buy it outright.

As you determine your long-term financial and home buying goals, consider all your options. You will be glad you did.

- Debbie Dahmen

Debbie Dahmen is a member of the Distinctive Properties team, a unique personalized real estate agency serving the south end of the Salt Lake valley including Draper, Riverton and Sandy. Family owned and operated, Darlene Dipo, Debbie Dahmen and DeAnna Dipo pooled their 60 years of experience to offer their clients flexibility and individualized attention. All three women have achieved the coveted designation of Certified Real Estate Specialists, a designation held by only 3% of real estate agents. Offering services including buying, selling, and relocation, Distinctive Properties offers relocation services throughout the United States. Visit www.distinctivepropertiesSLC.com for further information.