Put into operation the share capital of your second home
According CoreLogicthe average homeowner earned more than $ 26,000 in equity in 2020.
If you own a second home or cottage in a sought after area, you may have seen even greater equity earnings than average.
But what if you want to use this equity? Can you get a home equity loan or HELOC for your second home?
The answer may be yes, but the rules are a little different than for your home. Here’s what to expect.
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Housing equity loans and HELOC for a second homesmall
You do not need to sell your holiday home to gain access to the equity that has been created.
Alternatively, you could access the value of your home using redemption refinancing, a home equity loan or a home equity credit line (HELOC).
Redeeming a second home may be more appealing to some homeowners than changing the mortgage on their main home or reducing its equity.
Using your second home reduces the risk of being in a negative equity position with your main residence if the market takes a turn for the worse.
Fortunately, many lenders and banks offer mortgages for second homes.
It’s a little more complicated if you’re trying to refinance a property that is not your main residence, but that does not mean you can not take advantage of historically low interest rates if you do your job.
Rules for a second home HELOC loan or a share mortgage loan
Due to the increased risk of second homes for lenders, second home financing is usually accompanied by higher interest rates and stricter financing rules.
Buying a second home involves a higher down payment of 10 percent or more. And if you are refinancing a second home that you already have, you will need enough equity to make the redemption worthwhile.
You often need to leave at least 25% of the share capital for your second home untouched, which means you will need significantly more from 25% equity to make a refinancing loan with redemption or mortgage equity loan that is worth your while.
In addition, credit score requirements are higher in second homes and debt-to-income ratios are stricter.
Additional qualifications may include:
- Possession of the property for at least one year
- Higher credit scores (often 680-700 +)
- Higher advances, resulting in lower value for money (LTV) ratios
- Restrictions on geographical location
The good news is that second home mortgage rules are more lenient than investment real estate rules. Thus, it will be easier to find lenders who offer mortgages and HELOCs on your vacation home than on an investment or rental property.
Mortgage equity loan against redemption with redemption
Fortunately, although there are stricter requirements, you will not have to resort to a single loan option to access equity in your second home.
From a home equity loan to a home equity loan or a redemption refinement – you have alternatives.
Whether or not you should make a redemption refinement or choose a home equity loan or not will depend on your specific situation.
Housing equity loan or HELOC
If you already have a low fixed interest rate on your existing loan, it is definitely worth considering a home loan. This way you can maintain a low interest rate and payment on your existing mortgage.
In addition, with a home equity loan or HELOC, you will not have to start the loan again and extend the total time you are paying interest. This can make a second mortgage more attractive to someone who has just repaid their existing balance.
The decision between a mortgage or HELOC can be complicated, so you will want to do your research. But here are the basics:
- Mortgage equity loans includes receiving a lump sum from your own funds, which you usually repay at a fixed repayment period at a fixed interest rate
- Domestic share credit lines involves entering into a revolving credit line, secured by your home equity, which you can borrow and repay as often as you want within a specified “lottery period”. At the end of the draw period, you will have a set amount of time to repay the balance owed. HELOCs usually have variable rates
Both of these options are second mortgages – meaning you get a new loan over your existing mortgage. You will then have two monthly payments, most likely to two different lenders
Redemption by redemption
If you have an over-the-counter interest rate on your current mortgage, cash refinancing could help you withdraw equity and reduce interest costs at the same time.
Because a redemption refinancing is a “first” or “principal” mortgage, it will usually have a lower interest rate than a home equity loan or a credit line, which are both mortgages.
Just note, the rules for a redemption with redemption in a second home will be stricter than the redemption of a main home.
Expect higher interest rates, higher equity requirements and higher credit scores. In addition, the closing cost is usually higher for cash refinancing than for a second mortgage.
Why are the rules for second homes different?
Prior to the 2008 housing downturn, homeowners could easily use their home equity – and with very little equity.
But after 2010, mortgage lenders began to withdraw from these loose guidelines.
Instead of lending up to 100% of your home equity with relatively few credit requirements, many lenders have stopped offering mortgages of any kind on second homes.
Why; Unlike your home, holiday home mortgages pose a higher risk to lenders.
Your main residence is considered to have the lowest risk in terms of real estate. The house you live in is probably the only debt that is paid, regardless of the difficult times.
Holiday homes, on the other hand, are more dangerous. If times are tough, homeowners are more likely to give up on these mortgage payments when money is scarce.
In addition, second mortgages – including HELOCs and mortgages – are already considered higher risk. This is because these loans fall into the “second loan” position (behind your first mortgage), which means they could be repaid less or not at all in the event of foreclosure.
Thus, with the dual risk factors of a second mortgage on a second home, lenders are naturally more reluctant to offer these loans – and charge higher interest rates when they do.
Do not forget to shop for interest rates
Buying a cottage means you can enjoy the financial benefits of owning real estate as well as having a great vacation spot with your family.
Mortgage lenders will find different lending patterns for different types of real estate, depending on the lender and the mortgage program. If you can not find a lender who can help you, try a smaller, local bank or credit union.
Remember to always shop and compare loan options for your specific needs and financial goals.
The information contained on The Mortgage Reports is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its executives, parent or affiliates.