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I Have a Mortgage and Want to Buy Another House

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  By Forrest McCall | Last Updated:  February 17, 2022

If you own a house and want to buy a second home, then you’re in the right place. In this guide, we’ll talk about how you can do just that. One of the things you’ll want to be aware of are the challenges that go along with obtaining another house (and mortgage).

Specifically, we’re talking the financial challenges that are part of the process of buying a second home. Whether it’s a vacation home or a place that is across town, we’ll be happy to help you out.

The process does contain steps that you need to follow. One missed step and it can make the difference between getting approved or rejected from buying the house you want.

That means missing out on adding rental income (if you want to invest in real estate). Or purchasing a home that you can turn into a flipping opportunity. Purchasing second homes are common if you got exactly what you need. Let’s get started!

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Getting a Second Home

Can I Buy a Second Home Even if I have a Primary Residence?

The short answer: yes. The long answer is that it is possible to buy a second home even if you have a primary residence. The real question that you want to ask yourself is why you want to do this?

Are you looking for a place to stay when you are on vacation? Are you looking for ways to generate more money? There are plenty of reasons why you want to purchase a second mortgage.

It’s important that you make the determination before taking that great leap forward. It’s better to look before you leap into something that will change your financial situation (for better or worse). Find out how it can benefit you long before you decide to buy a second home.

Did you know that your primary residence can provide you funding for your second? Believe it or not, it can happen. Yet, there is a catch.

Your home equity will need to be large enough to get money to cover the cost. You have two options that you’ll want to consider. Here’s what they are:

  • Home equity loans: These are common when you want to get the money for your second mortgage. This is based on the equity of your primary residence. You’ll want to use it as collateral in order to receive the money you can use for buying a second home. This can be given to you by way of a home equity line or in a lump sum loan. Keep in mind that there are two different kinds of loans that you’ll want to be aware of. A regular loan will have a fixed rate. A HELOC will have variable interest rates. When considering home equity loans, find out what options you have and determine which is best for you financially.
  • Cash out refinance: This is your other option. What a cash out refinance does is it replaces the mortgage of your primary home. In its place is a mortgage that is new and much larger. If you go this route, you’ll likely get anywhere from 80 to 85 percent of your primary home value. When using this, you need to keep your eye out for caveats. This includes potentially high closing costs. This can take a bite out of the amount of money you intend to take out for purchasing a second property.

So now that you know your options that involve the finances of your primary home, decide which one is best for you. Weigh the pros and cons and determine which will be the easiest route to take given your current financial situation.

Buying a Second House

How much of a down payment will I need to buy a second home?

You will need a down payment of at least 10 percent for a conventional loan if you want to qualify for one. Keep in mind that most lenders will require an even greater down payment for your second home compared to the one you’ve put down for your first.

A higher down payment can cut down the amount of time and money you can pay off the property. If you have enough cash to do it, have at it.

Alternatively, if you have the cash you can pay off the home entirely and not have to worry about taking out a second mortgage in the first place. There is no point of a down payment. However, there are other options if you want to avoid one altogether.

These include government loans through the United States Department of Agriculture (USDA). You can qualify for those loans if you fit their requirements such as having a credit score of 640 or better and having a DTI that is 50 percent or less. These are just a sample of their requirements.

Let’s take a look at the other loans you can qualify for if you want to avoid paying a high down payment:

FHA Loans: These loans are offered by the Federal Housing Administration, a department under the authority of the US Department of Housing and Urban Development. Your lending services provider will inform you of the process that you need to follow in order to purchase a second home. The home you want to buy needs to be appraised by someone approved by the FHA. You must also occupy the property within 60 days of closing on it. The down payment will be 3.5 percent if your credit score is 580 or better. If your credit score is lower, it will be 10 percent.

VA Loans: If you are a veteran of the United States military, you can qualify for VA loans offered by the US Department of Veteran Affairs. The requirements include but are not limited to your time of service (181 days in peacetime, 90 days during wartime). This also includes serving more than six years of service in the National Guard or Reserves. If you have been discharged due to a disability you have acquired during your time, that requirement is waived. Mortgage brokers may require a certain credit score in order for you to qualify. For example, Rocket Mortgage requires a credit score of 580 or better.

There are loan terms that differ from one another, as you may notice. Before you apply for any conventional loan, it is important that you review the details to see if you qualify. If possible, a personal loan can be a good option for you if you don’t appear to meet the requirements of certain loans.

Again, every option is vital in terms of how you handle the financial factors of a second mortgage. Spend a good amount of time reviewing your options and do not rush into the process. If needed, you’ll want to consult a real estate agent for more information.

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Buying a Second Home as an Investment Property

If you are someone intended on purchasing real estate as an investment property, you’ll want to pay attention to this section. Because the financial aspect of this can also affect your tenant’s finances as well. Yes, generating rental income is rewarding but there are expenses that go along with it.

This includes making mortgage payments every month. You can decide on the amount of rent depending on several factors. This can include the proximity of certain points of interest, location, and how much of a profit you need to make without paying too much in expenses. You can try to find the lowest mortgage payment possible without having to hurt your tenants financially.

When the time comes to rent out the property, both you and the tenant may need to come to an agreement on how much rent is due. Have a mutual understanding regarding the expenses the both of you need to pay every month. If needed, the rent can also cover certain utility costs. If the tenant has to be responsible for them, you can offer a lower rental rate provided they are willing to keep their end of the agreement.

Also, your other expense includes property taxes. These will differ from one location to another. For example, if you plan on purchasing property in another state, you’ll want to know how much the property taxes compared to where you live locally.

Investment properties come at different purchase prices. Yet, the income and expense figures will differ depending on several factors. Are you willing to invest in a location where you pay less in property taxes, utilities, and other expenses? Or do you not mind purchasing a property in a place where they can be at a higher rate compared to the location of your current home?

Also, there’s also property management fees and emergency repairs that may be needed. So you’ll want to set enough money of to the side to cover this.

Your investment property can be apartment buildings or a single-family home. It can also be used as an AirBNB, which would be the perfect vacation property for those who need a place to stay when visiting a certain area. There are plenty of property options you can consider if the intent on buying a second home if for rental income.

If this is of interest to you, you’ll want to contact a real estate agent that sells these types of properties. Your options will depend on how the housing market is doing. You may be dealing with an abundant number of properties or fewer options.

It also helps if you look in areas that are largely populated. You may have better chances of finding property there. However, the biggest caveat is you will be potentially paying higher prices compared to cheaper properties that are bought and sold in less populated areas. Where prices are higher, the closing costs may be high as well.

What are the Benefits of Buying a Second Home?

There are some benefits to buying a second home. You’ll enjoy these once you have cleared all the necessary hurdles of the process. Here’s what you can enjoy:

  • Tax breaks: Yes, owning a second home can net you some pretty sweet tax breaks. Especially if you decide to use the interest from your HELOC for the purpose of repairs or property taxes. Deducting the interest from your mortgage can also help. If you are renting out a property, the rental income is subject to no taxes so long as the home is rented out for 14 days or less.
  • Excellent Return on Investment (ROI): If you are buying a second home as an investment property, you have the potential of getting an excellent return on investment (ROI). Buying a second home with the knowledge that the housing market is growing can make this a near certainty. When it comes time to sell the property, you’ll be getting a lot more money than you paid for initially. But who is to say whether or not you will sell the property at any point after purchasing it? You could be holding on to it for life and still get the additional income you earn.
  • You get to enjoy it yourself: When you open a second mortgage on another house, you don’t have to use it for anything other than your own personal use. If you want to save money on hotels and just want a place you know you can crash, you can use your second property for that purpose. Imagine having a personal retreat all to yourself. The good news is you don’t have to pay a lot of expenses frequently. It’s better to pay those on an annual basis like taxes or a mortgage payment than staying multiple nights in hotel rooms that can cost an upwards of $100 or more a night. A vacation home is exactly what you need if you are someone that plans on staying in a certain area for lengthy periods of time (such as spending all winter in Florida or some place warmer).

What are the Downsides to Buying a Second Home?

While we do mention the benefits, it’s better to mention the downsides as well. Nothing comes easy when you are dealing with two mortgages. With that said, let’s take a look at what you may be facing if you ever go down this road:

  • Additional monthly payments: In short, you’ll be paying two mortgage payments at the same time. Your existing mortgage and the other. To make it easier, it can be from the same mortgage lender. If you are dealing with two separate ones, it may be a little complicated. Not to mention, the monthly payments may differ from one another. Be sure to plan out your finances and determine how much you plan on paying per month. The interest rate may differ from one mortgage to another. Keep this in mind when you are making payments on each property. Having an additional mortgage is no easy task, so be prepared to handle the costs.
  • Maintenance costs: All properties will need maintenance done one way or another. This also includes your second home as well. You’ll want to set aside enough money that will cover these costs just in case you need to make emergency repairs.
  • Additional costs: There are other additional costs that you’ll contend with as well outside of paying the mortgage. You may pay an amount each month to an insurance company that covers your property in case of any damage done to the property (outside of a tenant’s carelessness). Not to mention, there are other expenses such as utilities, property management, and other relevant expenses.
  • It can be time consuming: Needless to say, maintaining a second home can be time consuming. Especially if you need to make repairs to it. It can also be time consuming if it comes time to sell the property to someone else. You won’t be able to sell the property right away as it can take months or even years. It comes with the territory of purchasing a second home with the intent of hanging onto it for a long time and eventually selling it for a profit. Whether it’s vacation homes or for the purpose of renting it, the amount of time you put into is important. There can be potential buyers, but they can back out of the deal for any reason such as the price or something else.

Want to Get a second home? See a real estate agent?

If the property is located in an area outside of where you live, you’ll want to find a real estate agent that will help. Let them know your intent with the property you plan on acquiring. It can be a vacation home or something else. They’ll walk you through the process such as which options you have for a home mortgage.

They’ll give you a list of their recommended lending services provided that you meet the specific requirements they have for qualification. You may be one mortgage provider away from purchasing a new house that can be your home away from home or an opportunity for extra income.

Your next home purchase may be even closer to your any primary residences. Before you venture out into areas far away from you, see if you can find something local. Find a buyer’s agent in your local area who may have a list of properties that are ready to sell. Also, it would help to consult a real estate attorney so the process can be as smooth as possible and no sneaky business is done on the end of the seller.

Buying another house can take quite a bit of time. As long as you follow the necessary steps and trust the process, you should be in good shape.

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Frequently asked questions (FAQ)

What credit score is needed to purchase a second home?

You will need a credit score of 620 (minimum) to qualify for a second home mortgage. However, it will depend on the mortgage provider as well. Some will require a higher credit score as their minimum. If you plan on buying a second home with cash, the credit score won’t matter.

What is the usual home equity loan term?

On average, a home equity loan term will go from 5 to 30 years. If you are using a HELOC, the draw period where you can receive the funds is within 10 years. You have up to 20 years to pay it back. If you choose a cash out refinance, the term will last up to 30 years.

Do I need to get rid of my first mortgage in order to buy a second home?

You do not need to get rid of your first mortgage at all. You can use it to acquire the funds you need to purchase a second home. You can use your home equity and it may be enough to cover any costs you could be dealing with.

How does the mortgage underwriting process work?

The process is basically assessing the risk of how much money is being lent to you. The lender will need to collect required information from you including your income. The higher risk you are aiming for, the more stringent the requirements will be for what they’ll need. They will check your credit history, the past interest rates you paid on your home, and much more. If you need a home equity loan, ask questions with the lenders you intend to work with before applying.

How can I find a mortgage with a competitive interest rate?

The best way to do this is compare what is offered to you by mortgage lenders. Some interest rates will be lower than others. Decide on which rate is best for you depending on your finances and how much you are willing to pay every month.

Final Thoughts on Getting a Second Home

Second homes can be possible if you know what you are getting into. You can purchase a new property later on but not know about the manageable downsides of it.

A home equity loan may be your best option. Or you can pay straight up cash. It’s all up to you and the financial goals you want to achieve.

You can purchase a vacation home you can stay at. No matter your intent or purpose, it’s possible to purchase a second home.

If you feel like you are in unfamiliar territory, you are not alone. Talk to a buyer’s agent and they’ll walk you through the process. They’ll answer questions regarding home equity and who to go to for anything regarding the financial side of dealing with a second home mortgage.

Forrest is a personal finance, entrepreneurship, and investing expert dedicated to helping others obtain life long wealth. He has a Bachelor's degree in business and has been featured in many popular publications including Forbes, Business Insider, Bankrate, CNET Money, and many others. To learn more about Forrest, visit the About Us Page for more info.
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