Kevin Onizuk is a partner in Breakwater Mortgage and has been in the lending business since the mid-nineties. In this interview, he details how to pre-qualify for a second mortgage.
Q. What is the first factor a consumer should consider before deciding to purchase a second home?
A. The first question to ask yourself is can you actually afford it? The lender will want the buyer to have a high enough income each month to pay for both the primary and secondary housing payments. The lender will also expect the buyer to have cash in reserve. Normally three to six months times the mortgage is expected to be in savings as insurance against any emergencies or economic hardships.
Q. What is the difference between purchasing a primary residence and a second home?
A. When buying a second home for personal or investment purposes the financial picture is slightly altered. The lender will require a larger down payment because they believe a loan on a second home is a higher risk. Lenders feel it is easier for buyers to walk away from a vacation home or rental property than it is from the primary residence. Since lenders believe second homes do not foster the same amount of owner commitment the loans are considered more of a gamble.
Q. Does owning a second home offer any tax advantages?
A. Tax deductibility can be tricky. Always consult your tax advisor. Mortgage interest and real estate taxes are usually deductible, but you must live in your second property for part of the year. If you choose to rent all rental income must be reported. Remember, any money spent to maintain the properties are deductible. In summary, property taxes, mortgage interest, insurance, repairs, utilities, cleaning and upkeep are all expenses. Keep careful records of all money spent on these types of endeavors.
Q. Are there any benefits to getting a home equity loan?
A. A home equity loan uses the equity from your primary residence to create the loan on a second home or investment property. It is a simpler loan to get because fewer questions are asked by the lender. The interest is also tax deductible. The only problem is that in the event you cannot make a payment you lose your primary residence. As I mentioned before, lenders find buyers in fear of losing their first home are less risky and will have a more difficult time walking away. There are benefits but in the long term a home equity loan could cost you more than you ever imagined. Think clearly about the possible consequences and be prepared make informed investment choices. A good loan officer will provide advice throughout the process. Home buyers who do not wish to obtain a home equity loan may want to consider a no doc or stated income loan.
Q. What kind of loan is best for investment?
A. A great way to have extra insurance on your vacation home or rental property is to get a Pick A Payment or Vacancy Protection Loan. This type of loan allows the buyer to choose one of four payment options each month: the 30-year payment, the 15 year payment, the interest only payment and the minimum payment. Of course, whenever possible the 30 year or 15 year payment are the best choices for the long term. In a pinch, however, you can lower the payment and pay off debt or handle other financial issues. This is the best way to protect your investment cash flow.
Q. How can I move forward and purchase a second home?
A. Make sure you have thought everything through about this type of purchase. Ask questions, do research, have a plan and be prepared. When you are ready the first step is to be pre-approved or pre-qualified before you even begin looking for a home. Find out if you can get a loan and what kind will work best for you. Once you have consulted with a loan officer at a reputable mortgage company you will be well on your way to an investment in your future.
Kevin Onizuk co-founded Breakwater Mortgage in 2003. Breakwater Mortgage has one office in Virginia Beach and two offices in Williamsburg, Virginia. They are dedicated to providing the highest level of service in the mortgage industry.
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