Typically banks charge higher interest when you buy a second home. I can’t think of any good reason for this – other than they can get away with it. But you don’t have to play this game with the bank. You can get a cheap mortgage for a second home at a very reasonable rate. I’ll explain how by way of example.
Pam is a very nice lady and she is interested in helping her daughter Jammie buy a home. While Jammie has the income to make mortgage payments, she can’t qualify for a loan because of some past credit issues. Pam is willing to take out the mortgage in her name but doesn’t really want to pay an artificially high rate.
Keep in mind that from the bank’s standpoint, this would be a second home for Pam and therefore the rate would be higher – unless Pam thinks outside the box. This is where it gets fun.
You see, Pam owns her own home free and clear – she doesn’t have a mortgage. This is the key to the solution for Pam and her daughter.
All Pam had to do was take out a mortgage against her primary residence and use that money to buy the house for Jamie. Again, owner-occupied mortgages carry lower interest rates than rental units or vacation homes.
Pam told her daughter that she’d buy her a home but it would remain in Pam’s name. Jamie would make the payments as rent. Pam would change her estate plan to reflect that Jamie would inherit the home upon Pam’s death.
Jamie had nothing to complain about. While Pam would own the home and get the tax benefits, Jamie’s mortgage payments would be less than her current rent. She would have a roof over her head. She’d end up owning a home. And she wouldn’t have to come up with any down payment. Sounds sweet-a-kimbo to me.
Indeed, Pam saved a bundle by going this route. If you’re thinking about buying a second home (for whatever reason) first consider tapping into the equity of your primary residence. You’ll never get a lower rate than on an owner-occupied dwelling.
I do want to go on the record and explain that you should only buy a home for your child if you can really afford it. And take a sober look at your kid. Is he really going to make those payments? He knows you aren’t going to evict him or sell the place. How responsible is he? And if he runs into a rough patch and doesn’t make his payments to you, how will that impact you?
By the same token, I’m no fan of buying vacation property. In most cases, this is a very expensive proposition. Vacation property typically doesn’t appreciate as quickly as other real estate, it can be expensive to maintain and is often under-utilized. In other words, it’s usually far cheaper to rent a place a few times a year than to buy a vacation home.
But with that said, if you decide to buy a secondary piece of real estate, your financing option of choice would be to first tap into the equity of your primary residence.
What other inventive ideas do you have to help folks looking for a mortgage on a second home? If you needed to start borrowing money inexpensively, how would you go about it? Would you do what Pam did?