Buying a House When You Already Have a Mortgage

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If you already own a home and you’re thinking about buying another to use as a vacation house or as an investment property that you can rent out, you will have to clear higher hurdles than you did when you bought your first house. Here are some important things to know.

Lenders Will be Stricter
A second mortgage can make you riskier in a lender’s eyes. A lender will want to be confident that you can afford mortgage payments, taxes, maintenance, homeowners insurance, and other costs for both properties.

You may need a higher credit score to qualify for a second mortgage than you did for your first one. A lender may also be stricter when it comes to your debt-to-income ratio. If you still owe a large amount on your current mortgage or have other substantial debts, a second mortgage may put your debt-to-income ratio above the maximum the lender allows. You may be required to make a larger down payment for a second home, and a second mortgage will probably have a higher interest rate. Guidelines will vary from company to company.

Buying a second home as an investment property to rent out can create its own set of risks. There is no guarantee that you will have a renter living there consistently or that the renter will pay regularly and on time. A renter may also cause damage to the house. 

Mortgage Options to Consider 
The type of mortgage you will qualify for may depend on how you plan to use the second property. Some types of loans, such as those issued by the Federal Housing Administration and the Veterans Affairs Administration, can only be used to purchase a primary residence.  

The mortgage term you choose will affect your interest rate and monthly payment amounts. Interest rates are generally lower and monthly payments are usually higher for 15-year mortgages than for 30-year loans. You may be able to pay off a 15-year mortgage faster and spend less in interest, but it may be challenging to cover high monthly payments if you already have a mortgage. 

How to Fund a Down Payment
You may be able to use the equity in your current home to help you finance the purchase of your second. With a cash-out refinance, you may be able to replace your existing mortgage with a larger loan and receive cash at closing that you can use to make a down payment on a second home. You may also be able to take out a home equity loan or home equity line of credit to access money that you can use to fund a new home purchase.

Get Professional Advice
Talk to your financial advisor about how a second mortgage could affect your other financial goals, such as saving for retirement and college. If you decide to buy another house, compare loan terms from multiple lenders.