Real Estate Blog

    Sep
    13

    6 Key Tips for Managing a Second Mortgage

    Owning a second home is a dream for many homeowners. Especially for Michigan residents, the idea of owning a lake house or house “Up North” is a lot less far fetched than many think. Aside from a permanent second home, there are also times in your life that may require a second mortgage, like closing on a home prior to selling your current home. Whatever your reasons are for needing a second mortgage, obtaining and managing one isn’t as tricky as you may think.

    Here are 6 key tips for managing a second mortgage:

    1. Choose the right timing

    Choosing the right timing is the first important tip for managing a second mortgage. When a lender analyzes your finances to gather information about whether you are a good candidate for a loan, timing is everything. Six months prior to getting approved for a loan you should avoid any large purchases that could temporarily affect your finances and credit score. For example, avoid buying a car, space out buying your homes and don’t open up a credit card for additional funds. These could negatively affect getting a second mortgage right of the bat.

    2. Work with an experienced mortgage broker

    The second tip for managing a second mortgage is to work with an experienced mortgage broker. Because a second home can be a lot more complicated than a first home, a mortgage broker will help you navigate different mortgage and tax options that work for your particular situation. For example, let’s say the second home you’re purchasing is from a family member and they’d like to grant you a gift of equity to cover the costs of the down payment. An experienced mortgage broker will know how to navigate these unique situations and start off your second mortgage on the right foot.

    3. Maintain separate bank accounts

    Another tip for managing a second mortgage is to keep separate bank accounts. Separating funds will allow you to not only keep organized, it will also help a lender assess your financial fitness when it comes to approving you for another mortgage. Keep in mind, however, that moving large amounts of funds around to different accounts in the six months prior to working with a lender is not a great idea as it may negatively affect your credit score and how the lender perceives your finances. Spending over a year or more contributing to a separate bank account for your second mortgage is a great way to stay on top of your finances to prep for a second mortgage.

    4. Lower key areas of debt

    When applying for a mortgage at any point, regardless whether it’s your first or fifth mortgage, the main area that is assessed is your debt to income ratio. One way to be more financially fit for a second mortgage is to spend time lowering all other areas of debt. This includes anything from car loans to credit cards and student loan debt. Working on chipping away at your key areas of debt will increase your likelihood of getting approved for a second mortgage and will also help you prepare for allocating your income to a new property.

    5. Utilize a home equity line of credit on your first mortgage

    Another option when working to obtain and manage a second mortgage is to work with the equity you have in your first property. In some cases, you may have already paid off a ton of your first mortgage leaving you with a large amount of equity in your home. Using this equity, you may qualify for a home equity line of credit and you can use to cover down payment and other up front costs for your second home.

    6. Opt for an income property appraisal

    A final option for managing a second mortgage is to consider an income property. A second home isn’t typically used year-round so there’s always opportunities for it to be rented out for additional income. If you’d like your second home to be evaluated for its income potential you can get an income property appraisal to lay out how much monthly and annual income is possible for a mortgage broker. This may affect the type of loan available for the property, and how the lender perceives your financial fitness for the property. Setting up your home for rental income is a great way to initially pay off your second mortgage debt and can take some of the stress off of your monthly finances.


    Overall, a second mortgage is attainable if you follow these 6 key tips for obtaining and managing one. Taking out a second mortgage can help make your dreams of a vacation home a reality, or can help reduce the burden of purchasing a new home while you work on selling your current home. The best way to find out if a second mortgage is a realistic option for you and your family is to consult with a qualified realtor and mortgage broker. Using these two professionals as resources can help you get creative with your finances to make a second mortgage work for you.

     

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