Ask Bill your personal finance question

Second Home and Second Mortgage

I want to buy a second home to rent it out. Would that consider a second mortgage? How much higher is the interest for this t

I want to buy a second home to rent it out. Would that consider a second mortgage? How much higher is the interest for this type of loan?

Read full question
Bill's Answer
3.5
/5.0
(4 Votes)

Bills.com | Find Learn Save

A second mortgage refers to a second (junior) lien against your home, and it usually refers to a small mortgage loan that is taken beyond your first primary loan. Frequently when someone borrows more than 80% of the value of a home a second loan is taken out for the amount over 80% to limit mortgage insurance.

You are referring to a non-owner-occupied loan, and yes you can apply and get a loan.

The only way to determine whether or not you will qualify for a non-owner occupied loan is to apply for a loan with several different lenders and/or brokers. Bills.com makes it easy to compare mortgage offers and different loan types. Visit the Bills.com mortgage savings center and find a loan that meets your needs.

Not only will these mortgage professionals be able to tell you whether or not your currently qualify, but if you do not qualify, they can tell you what aspects of your financial situation might cause you problems, and make suggestions about how to improve your chances to qualify for a loan.

If you would like to read more about mortgage refinance loans, I encourage you to visit the Bills.com Home Refinance Resources page.

The three main considerations that a lender will consider are your credit history, your home's LTV, and your DTI.

1) Credit History

First, your credit history is a major consideration when you are shopping for a new mortgage. A favorable credit score will increase your chances of finding the best loan with a low rate and low points, since you will qualify for better interest rates than those available to people with credit problems. Currently, the average interest rate for a new 30-year fixed-rate loan is 5.00%, and the average FICO credit score is 723. So, if your credit score is better than 720, you should expect to qualify for an interest rate of around 5.00%, or possibly lower. However, if you have had credit problems in the past, you could be forced to pay a significantly higher interest rate, which could make your monthly payments much higher. For example, the monthly payment on a $100,000 30 year mortgage at 6.5% is approximately $630, plus insurance, taxes, etc. If the interest rate on the loan increases to 9.5%, the monthly payment increases to $840, an increase of over $200 per month. As you can see, your credit score, which is one of the major determinants of your interest rate, is extremely important when shopping for a new mortgage.

2) Loan to Value / Equity

The amount of equity you have in your home (or its inverse - the loan to value or LTV), and the length of time you have been paying on your current mortgage will also be major considerations. In order to lower your payments, you must either obtain a loan with a lower interest rate than your current mortgage, find a mortgage with a longer repayment term, or borrow less than the original balance of your current mortgage. For example, if you have $60,000 left to pay on a $100,000 mortgage, you could cash out $40,000 in equity and keep the same monthly payment as the old loan, assuming the interest rate and loan term remain the same. However, if the balance of your new mortgage will be more than that of your old mortgage, you must either find a lower interest rate or take a loan with a longer repayment term, if you want to keep your monthly payments the same. The ways to build equity are to either pay down your mortgage over time or to build equity by your home appreciating.

3) Debt to Income Ratio

The third big variable is your debt to income ratio, or DTI. Debt to income is taken as a measure of your ability to comfortably make payments on the mortgage with your cash flow. Most lenders look at combined DTI, so the percent of your income that goes to debt payments (including mortgage, auto loans, credit cards, etc) to make sure that you can afford the loan. Some borrowers will allow stated income loans, where income is not formally verified, although given what has happened with defaults it is less likely than ever to get approved for a high DTI stated income loan.

As I mentioned before, you need to shop around with different lenders and brokers to find the loan that best suits your needs. I encourage you to start your search by visiting the Bills.com Home Refinance Resources page where you will find a wealth of information about home refinance programs. If you enter your contact information in the Bills.com Savings Center at the top of the page, we can have several pre-screened mortgage brokers contact you to discuss the options available to you.

If you cannot refi today, there is always a chance that you could build equity over time if your home appreciates or if you pay down debt.

I wish you the best of luck. I hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

www.Bills.com

Get Mortgage Rates!
3.5
/5.0
(4 Votes)

People also like to Read

Betsalel Cohen

Mortgage programs have different minimum credit score requirements. However, lenders often have stricter rules. It is importa... Read more >>

Daniel Cohen

FHA Loans | FHA Loans have huge benefits, including VERY low down payments and low credit limits. Get FREE info on FHA loans... Read more >>

Betsalel Cohen

Mortgage Basics - Down-payment, Equity, and LTV | Learn about mortgage terms relating to your property's value and how it aff... Read more >>

Betsalel Cohen

Whether you are refinancing or buying a home you will ask yourself if you can afford the mortgage. Learn to prepare and evalu... Read more >>

Betsalel Cohen

Qualify for a Mortgage | You can get qualified for a mortgage and the best rates by preparing yourself. Make sure that your c... Read more >>

Mark Cappel

Applying for a mortgage with bad credit and a spouse isn't as difficult as you may think. Learn the what lenders look for whe... Read more >>

Betsalel Cohen

PMI | If you are looking to buy a house and take a mortgage loan with a low down payment then PMI can...... Read more >>

Brad Stroh

Refinance My Home? If you are asking 'Should I refinance my mortgage?' or 'Is refinancing my home a good?', then check out ... Read more >>

0 Comments

1500 characters remaining
loading...