4 July 2022
By Roger Kennedy
roger@TheCork.ie
Property Business
Owning a second home is a dream some people aspire to achieve. Aside from having their primary home, a second home allows someone to enjoy a change of scenery. For example, if they have a second home at the seaside, they can opt to stay there for a much quieter and calmer environment. Moreover, this could also be a great way to generate income, as they can choose to rent their property out when not in use.
Suppose you’re looking to buy a second home. In such a case, in this article, we’ll outline some insights to help you get started in knowing possible financing options.
- Cash
One of the easiest ways to finance the purchase of a second home is using cash. This way, you get to own a property mortgage-free.
However, in this approach, consider starting to put some money aside as early as you can. You can start small by reducing some expenses. For instance, you can minimize extra spending such as dining out or impulse buying. You could also save some money by lowering your electricity bill by switching to energy-efficient appliances and lightbulbs.
You could also get cash to purchase your second home by sourcing funds from a private lender. You can check out Novellus Ireland or any other reputable and reliable companies to help you. Note that in some cases, some lenders may check your credit score. Therefore, it’s best to start improving yours as soon as possible to increase your chances of being credited.
Aside from private lenders, you could also ask for a loan from a friend or loved one. Some may allow you a more extended repayment period or charge you an affordable interest rate.
- Home Equity Loan
A home equity loan could also be helpful. This option allows you to borrow cash against the equity you’ve built in your principal home. The equity can serve as your collateral. In most cases, this loan is based on the difference between your second property’s current market value and the mortgage balance on your primary residence.
Your lender may give you a lump sum when taking a home equity loan. This means you’ll get all your money in one pay-out. You’ll pay back the cash in equal monthly instalments with a fixed interest rate. These are some of the things most aspiring homeowners love about this financing option.
That said, since this is a secured loan, you could risk losing your property to your lender if you don’t pay your instalments. Therefore, if you consider a home equity loan, ensure you prioritise this debt. Making smart financial decisions will also help.
- Home Equity Line Of Credit
Just like the home equity loan discussed in the previous section, a home equity line of credit (HELOC) is also a secured debt that relies on your principal property’s equity as collateral. However, for a HELOC, you can access revolving lines of credit that you can draw or repay continuously in the same way credit cards work. Many aspiring homeowners may prefer this financing option because they’re more flexible.
Although, it’d be worth noting that HELOC has its disadvantages too. For instance, its interest rate is variable, unlike a home equity loan. If the base rate interest increases, so will your HELOC interest rate. And since it’s a secured debt, you could also risk losing your property if you default on the loan. Moreover, if you use an entire line, you’ll raise your credit utilisation ratio and decrease your credit score. Therefore, keeping up with your loan payments and avoiding taking huge equity amounts may be best.
- Cash-Out Refinancing
Cash-out refinancing may also be an excellent way to fund the purchase of your second property. This option lets you refinance your primary home’s mortgage for more cash than what you currently owe. You can use the extra money to buy your second home.
Though this can be an excellent financing option, your monthly mortgage instalments may rise because of the high loan amount from the cash-out refinance. Also, you may have to pay for the closing costs.
Wrapping Up
Owning a second home can be a dream real estate investment for some. And suppose you’re planning to buy one; this article has outlined some financial options to fund this purchase.
As advised, you can use cash, a home equity loan, a home equity line of credit, or cash-out refinancing. However, before settling on one of these financing options, it’s essential to research and consider their advantages and disadvantages first.
