YOUR MONEY-What to consider when financing a second home
NEW YORK Dec 10 (Reuters) - If the American dream is to own a house, you know you've really arrived when you have two of them.
In 2011, Allison and Doug Gumbs, of Washington Crossing, Pennsylvania, bought their second house, in Avalon, New Jersey, taking advantage of low interest rates and a time when the market was particularly floundering.
Allison Gumbs says that their three-bedroom and one-bathroom house was "a major fixer-upper, though down there they call it a 'tear down,' meaning it really just was sold for the lot value."
It still cost $720,000, which may sound like a lot for a tear down but due to the location, the Gumbs felt it was a relative bargain. "We always wanted our own beach home," Gumbs says.
While owning two homes may be doubling down on the American dream, paying for two mortgages kind of ruins the fun. That's why Allison, a communications consultant, and Doug, a managing partner at a security management firm, rolled the mortgage for their second home into their first.
"It just seemed easier to consolidate... and less of a burden," Gumbs says.
Consolidating two mortgages is about as innovative as it gets when you've got two mortgages to pay, says Josh Moffitt, president of Silverton Mortgage Specialists in Atlanta.
"These days, there is not as much creativity in lending and available products as there was in the past, and rightly so," says Moffitt, noting the lingering impact of the housing crisis.
If you're thinking of whether to consolidate two mortgages or pay each separately, the decision should come down to whether the math works, factoring in the interest rate, fees and terms of the loan. The numbers should also be the deciding factor when deciding whether to have two mortgages at a single financial institution or at two.
There is no right or wrong when deciding whether to use one or two lenders.
"Having the loan at two lenders can add some additional paperwork and costs, but it isn't major," Moffitt says.
And whether a homeowner opts for one mortgage or two, there are distinct advantages to having a mortgage.
"Unless an individual strongly dislikes holding debt, it can make sense for them to keep a mortgage even when one is not required, due to the tax deduction of interest, leverage - the opportunity to reinvest the mortgage proceeds and yield a higher return - and increased liquidity," says Sharon Appelman, a director of a financial planning and investment management firm in New York.
If you're purchasing a second home, here are some financing issues to consider.
IF YOU CONSOLIDATE
When combining mortgages, a homeowner needs to pay attention to whether they will go over the limit of a conforming loan. The limit for a conforming loan is $417,000 in most counties in the country - but it is $625,000 in more expensive markets such as New York and Los Angeles.
If the two mortgages exceed the limits of a conforming loan, a homeowner will be required to get a jumbo loan. Historically, that has meant paying a higher interest rate, although in September rates on jumbo loans dipped below conforming loan rates and have so far remained lower, making jumbo loans more appealing than in the past.
However, jumbo rates aren't always lower than traditional loans. As with any loan, the best rates depend on one's credit score and what your lender is offering. And because jumbo loans usually require a heftier down payment, sometimes as much as 30 percent, Moffitt says that might negate the advantage of a rate that is half or a full percentage lower than a traditional loan.
"Jumbo loans can be a little tighter on guidelines when it comes to things like credit score and debt ratio, so it's worth comparing to see if a buyer fits all options," Moffitt says. Borrowers typically need a credit score between 720 and 780 and a debt-to-income ratio of no more than 38 percent.
A big benefit to consolidation is that it can make ownership of two homes a little more efficient. For instance, if rates drop in the future and you want to refinance, you only need to be concerned with getting approval from one mortgage lender instead of two.
Consolidating loans has paid off well for the Gumbs. They refinanced the loan for their two homes in 2011, at 4.375 percent, and again in 2012, at 2.875 percent. As a result, they were able to spend $85,000 on the renovations for their second home.
Helping to justify their investment in the second home: the value of the houses in their neighborhood is now $100,000 higher, says Gumbs.
IF YOU HAVE TWO MORTGAGES
There are reasons why maintaining two mortgages can work out well, says Appelman.
You could get another home equity line of credit with your second home, but that's usually more difficult to do with a secondary residence. It's probably well worth it, however, if you can get a lender's approval.
"Some clients like to take one out but keep a zero balance as a contingency plan," Appelman says.
Second homes are a little riskier than primary residences from a lender's perspective. "If someone runs into financial issues, they will typically default on the second property first," Moffitt says.
And if you plan to use your second home to rent out, it's considered an investment property, which will make it more expensive to borrow. Expect to pay an interest rate that's a half-point to a point higher than you would for a primary residence.
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