Ever thought about investing in a vacation house or second home but were worried your budget wouldn’t allow for it? Many people don’t realize that there are many ways to finance a second home.
Before you even decide to a buy a second home, however, it’s important to decide whether the home will be a sound financial investment.
The easiest way to do this is to determine an estimate of your monthly expenses for the second home you’re looking to own, including home maintenance, necessary staff services and mortgage payments.
If the estimated rent you’ll gain from the home while you’re away is more than the monthly costs, then a second home is more than likely a good investment.
While a second home may not be possible for everyone, be sure to take a look at the following ways you can finance your second home before ruling out the option completely.
1. Home Equity Line of Credit.
The most common way to finance a second home is to take out a loan. In order to borrow money for a real estate purchase, however, it has to be secured against another asset.
A popular choice of asset is first homes. This type of credit is known as a home equity line of credit, and is a common choice for second home buyers.
Cash from this line of credit can be used as a down payment for your second home, and interest is deductible.
2. Borrow against a 401(k) plan.
You can typically borrow up to half the balance on your 401(k) with no penalties and don’t have to repay it for years (unless you lose or quit your job).
Depending on how much your 401(k) is worth, you could end up making more money for retirement by investing in your second home than you would have gained by holding onto your 401(k).
3. Consider a second mortgage.
Though second mortgages bring double the interest rates of first mortgages, they’re still cheaper than credit cards.
To make monthly payments more affordable, sign up for a long-term mortgage, such as a 30-year rather than a 15-year.
This can lower monthly payments by up to 20% or 30%.
4. Choose your location wisely.
When deciding to finance a second home, it’s important to choose just the right location.
Some locations for second homes go through constant up and down, or boom and bust cycles. Clearly, such locations are not ideal; the fluctuations in demand will mean that the amount of rent you can charge will vary constantly as well.
Locations such as Los Cabos have real estate markets that are always active as a result of the year-round warm weather, stunning location, and proximity to the United States.
In short, choosing a second home location that draws renters year-round will help you earn some extra cash to make those monthly payments.
If a second home is indeed a good investment for you, there are many ways to make it happen!