If you are thinking about purchasing a second home, you probably already have figured out that doing so makes financial sense overall. But that doesn’t mean that there are not some hurdles to clear, one of which is figuring out how to afford the down payment.
If you have not come up with a way to put money down on a second home yet, here are a few ideas.
1. Save up the money and pay cash.
Ideally, you could just wait and save until you have enough to put a down payment on a second home. After all, you already have a primary residence, and thus should be in no hurry in general to purchase a second home.
Still, there may be situations where you have good reasons not to want to wait. For example, maybe you have found your dream home and know that it will not stay on the market for long. If you can afford the house, it makes sense to move on it fast, even if that means borrowing to meet the down payment requirement.
2. Borrow money from family or friends.
If you do need to take out a loan to finance the down payment on a second home, you might first consider turning to friends and family to see if you can get a no-interest or low-interest loan.
In fact, some people even choose to purchase a second home with family or friends in order to make doing so more affordable. Doing so may make sense as neither party will inhabit the house year-round. It is a big decision which needs careful thought, but in some cases, can save everyone a lot of money and make it easier to afford the down payment.
3. Borrow against your home equity.
There are various types of loans which might be available to you if you have sufficient equity in your primary residence. Examples include home equity loans, home equity lines of credit (HELOCs), or reverse mortgages (you need to be a senior citizen to qualify for the latter).
Borrowing against your equity may be advantageous in that your resulting loan might carry a lower interest rate than a lot of other lending products. And in the case of a reverse mortgage, there are many additional benefits, not the least of which is that the loan doesn’t come due until a maturity event such as the sale of the primary residence or the death of the last borrower.
4. Get a cash-out refinance.
An alternative to borrowing against your equity is to replace your existing mortgage with one which is larger, a process known as a “cash-out refinance.”
The reason it is called that is because after your refinance to the larger mortgage, you have borrowed extra money which is distributed to you as cash.
You can then take that cash and use it as a down payment on a second home.
5. Cut into your retirement funds.
One more idea for financing the down payment on a second home is to take out a 401(k) loan. The upside of doing this is that it is fast and easy compared to many other methods.
There are several potential downsides, however. For one thing, you probably will have to pay the loan back within 5 years. For another, your paychecks will reduce through deductions. Plus, you may not be able to contribute again until you pay off the loan.
Ultimately, no matter which option you go with for financing your down payment, there will be pros and cons. So, you will need to evaluate all the possibilities carefully.
How Can You Keep Your Down Payment as Low as Possible on a Second Home?
Regardless of what method you use to finance the down payment on a second home, the way to minimize that down payment is to apply when your credit score is as high as possible and your DTI ratio is reasonably low.
Buy a Second Home in Washington State Now with Blue Square Mortgage
Blue Square Mortgage has helped many borrowers in the Seattle area and throughout Washington to successfully apply for a mortgage for a second home.
If you are ready to buy your second home, please give us a call today at (206) 352-6453 to schedule your consultation.
During your consultation, we can give you recommendations for options to minimize your down payment on your second home and finance that down payment. We look forward to helping you purchase the second home of your dreams.