Are you planning on buying a second home while still paying on a mortgage of your primary residence? While it’s easy to say you shouldn’t partake in that risky endeavor, it’s not necessarily as impossible and stress-inducing as it sounds. Consider some of the things your lender will look for if you want a second home and plan on financing a second mortgage. In some cases, you may have to apply some creative financial maneuvers.
The Usual Consideration of Debt-to-Income Ratio
Bank of America reminds that your debt-to-income ratio will matter on your second mortgage as much as it did with your first mortgage. This time, the ratio will go by what your debt total would be after paying your initial mortgage each month. If you’re stretching things financially, you could be in jeopardy of ruining your debt-to-income ratio. Normally, you wouldn’t be considered for a second mortgage if the ratio exceeds 36% of your pre-tax income each month.
Your real challenge isn’t so much in your first mortgage, but also calculating what other debts you have in addition. Sometimes other debts can exceed what your initial mortgage costs, particularly if you’re also financing a car. This doesn’t mean you may not have other debts that relate to your initial mortgage like property taxes and homeowners insurance.
Before you even try for a second mortgage, calculate the debt-to-income ratio yourself. It’s as simple as dividing the total of your debts with your pre-tax income you have coming in monthly. Your total will be the percentage that should determine whether a second mortgage is possible or madness.
Then again, if you have a madness streak, you might be able to use some creative financial methods to get that percentage down.
The Balancing Act of Refinancing
While it’s a complicated process, it’s possible to refinance your initial mortgage so the payments can be made lower. Keep in mind that refinancing your mortgage means you won’t be able to sell your house any time soon. That could be a major pain if you’ve been paying on an initial mortgage for years and plan to sell that primary residence soon for an easier transition into your second home.
One of the most creative refinancing methods is to do a debt consolidation loan where you can use your home’s equity to lower interest rates. These have to be planned carefully, however, because you’re consolidating various debts into one larger loan. While it can lower your interest rates and perhaps help your debt-to-income ratio, it could be a major expense each month.
Your other option is to take any extra money you have and apply a larger down payment on your second home. This will lower your second mortgage payments and bring your debt-to-income ratio down. Regardless, if it means dipping into your life savings for the larger down payment, you’re dealing in high financial risk.
Any other options would be to pare down your credit card debt or refinancing your car loan. In turn, this might be a more workable goal. That’s because it’s something you can do over a set period of time while placing the purchase of a second home on your immediate future goal list.