Second Home Mortgage Loan

Second homes are purchased either to live in them, or for investment purposes. Either way, one of the two homes of the second homeowner becomes investment property. Investment property implies that the owner will derive income in form of rent, or any real estate appreciation at a later date.

The difference between second mortgage and home equity loan is that a home equity loan is a mortgage loan given to the borrower against first lien on the residential property, whereas second mortgage is as the name indicates, second lien on the same residential property. The borrower gets the first mortgage, i.e., the home equity loan, on better terms and conditions. Therefore, interest rates on this mortgage are lower, and the term of repayment is longer, effectively bringing down the equated monthly installment payable on this loan. Unlike this, second mortgages are for shorter duration. The amount of loan granted under second mortgage is also lower since it is only against the capital appreciation since the first loan, and any loan amount repaid. Interest rates applicable to second mortgages are higher.

Mortgage of second home would definitely be required for financing the investment property. For this purpose, an investment property purchaser can choose to take a second mortgage on the first home. Since real estate properties appreciate over a period of time, the value of the house increases. In addition, the second homebuyer would have paid part of the mortgage on the first home by this time. Effectively, there is some value of the first house, which can be withdrawn, and utilized towards down payment for second home. Therefore, a borrower takes a second mortgage on the first house to enable him to meet the down payment requirement for purchasing the second home.

The lender may be agreeable to offer only 60 to 70 percent of the value of second home as the loan amount. This is because lender is not confident that the borrower needs the house, and will pay the amounts regularly. Therefore, the second homebuyers often take a second mortgage on an existing home.

The terms and conditions of mortgage loan for purchasing the second home are also not as good as the terms and conditions applicable to the home equity loan granted to the homebuyer on the first home. The lender offers such loans at higher interest rates, and even the term for repayment is less. This translates into higher equated monthly installments payable by the second homebuyer.

There are several advantages of owning a second home. Rents increase quite regularly, and these can nullify the negative impact of inflation on income in retirement. Apart from this, the homeowner gets another asset, on which loans can be taken for meeting any emergencies. The interest component in the equated monthly installments paid during any year can be set off against income of that year, effectively reducing the taxable income, and therefore tax. If need be, the second homeowner can also sell the second home, and pull out the capital invested along with the capital gains. Capital gains accumulate over the interim period and are taxed only when the homeowner sells the property. Effectively, the wealth of the second homeowner keeps on increasing without the homeowner paying any taxes for a long time.