Buying a second home is a milestone event for sure, and it could be closer than you think.
Thanks to still-surging home prices and growing home equity, the money you need to buy a second home could already be in your existing home. A home cash-out refinance on your existing home could release enough money for a down payment on a second home and more.
Good reasons to use a cash-out refinance to buy a second home right now:
- Take advantage of your increased home equity.
- Home prices are steadily returning to reasonable territory.
- When home values shoot up again, you'll own two homes.
- Renting out your second home could be more profitable than ever.
- The cash you get from the first home could be enough to meet the important 20% down payment threshold on the second home.
Using a Cash-Out Refinance to Buy a Second Home
Besides home improvement projects and paying off ludicrously high-interest credit card debt, another popular use of a cash-out refinance worth considering is buying a second home with it. Although buying a second home is a big financial move, it is now within the reach of more homeowners because home values have steadily—some would say shockingly—risen for the past few years.
Home equity has risen dramatically too, which improves how you look financially in the eyes of lenders. Your home equity, years of regular mortgage payments, better credit rating, and years of gainful employment combine to make you a more attractive borrower this time around. You might qualify for better interest rates and terms on a home refinance than you did on the original mortgage.
The right lender can help you decide if the time is right to capitalize on high home values and your growing home equity to empower a second home purchase. This is just one of the interesting scenarios a quality home lender can walk you through. For instance, you could determine how to keep your payment the same while cashing out an impressive sum.
How much cash are we talking about?
Home value is a key component of a cash-out refinance because the more your home is worth, the more cash you can obtain. Although single-family home prices finally slowed their climb last quarter and are predicted to continue on that path, as reported by Yahoo Finance and others, they still rose about 14% nationwide.
With an ordinary home refinance, you borrow enough money to pay off the balance on your existing mortgage (plus closing costs if you choose).
With a cash-out refinance, you borrow more than the balance on your existing mortgage and take the difference in cash. How much more money you can borrow depends on your home's value and your financial details, but you might be able to borrow as much as 80% of the value of your home.
A mortgage payment calculator can help you determine how much equity you can tap and what you can afford to pay monthly.
For example, let's say that your home is appraised for $325,000, several thousands of dollars more than what you paid for it. You currently owe $215,000 on the mortgage. You might be able to sign on for a cash-out refinance to borrow as much as 80% of $325,000, which is $260,000. Once you paid off the old mortgage, you would be left with $35,000 in cash.
You could pay the closing fees immediately (say, 3.5%) because it's much cheaper to pay closing costs up front and still be left with around $26,000.
Can I Buy a Second Home With a Cash-Out Refinance?
When you cash out some equity during a home refinance, the result is a lot of cash at once, and cash can be used for whatever you like. Popular uses are to pay off more expensive debt, like credit cards and student loans. Home repairs and improvements are another common use. Buying a second home is definitely possible with the money you get by refinancing your home.
The money you acquire from a cash-out refinance would make an excellent down payment on a second home.
Three ways you save when you make a bigger down payment.
A cash-out refinance will give you a pile of money all at once, enabling you to make a big financial move like buying a second home. A bigger down payment will benefit you in many ways. Here are the top three.
Lower interest rate. You might qualify for a lower interest rate when you put more money down on a second home. "Lenders like to see larger down payments because they can more easily get their money back if you default on the loan." says the financial advice site The Balance. "By reducing your lender’s risk, you can potentially reduce your interest charges."
Lower payments. You will owe less on the second home when you put more money down, resulting in a lower monthly payment. Debt you can comfortably afford is always better than the opposite. Owing less makes you more financially stable and brings you greater flexibility. If your income unexpectedly drops or the second home hits a dry spell of renters, an affordable payment can keep your stress level low.
No PMI. Private mortgage insurance is coverage you buy to protect the lender, not yourself, but you won't be required to carry it if you put down 20% or more. Since a cash-out refinance gives you a lot of money up front, you could put down 20% on a second home and dodge PMI, which otherwise would cost you 0.3% to 1.15% of the home loan amount.
Whether you have your eye on a lake house, a downtown condo, or a quiet suburban place, the second home you buy through a cash-out refinance doesn't have to sit empty when you're not living in it. You can earn income by renting out the second home.
Earn Passive Income in a Red-Hot Rental Market
Home equity wasn't the only thing skyrocketing over the past year. Residential rents climbed almost everywhere too. The national average rent in 2021 for a two-bedroom place increased 13.7%, according to iPropertyManagement.
Using the money you acquire from a cash-out refinance to buy a second home gives you the option of becoming a landlord and earning considerable passive income, especially if the home is in a location desirable to young families, vacationers, or retirees. Of course, if you currently live in the more desirable location, you can consider relocating to the second home and renting out the first.
Sometimes you don't have to look far to find a good second home to buy and rent out, as landscape architect Thomas Cain learned. "I wanted to buy in an historic neighborhood, near downtown, where I worked, hoping for some gentrification," he says. "I hadn't considered becoming a landlord, but liked the idea of fixing up the place and having other people pay for most of my mortgage."
He ended up buying the building next door to his current home, making maintenance and management that much easier. "My decision to acquire properties within eyeshot of my home is paying off in the form of income, but also better quality of life for me and my tenants. As they say, you can't choose your relatives. But, if you own their houses, you can pick your neighbors."
Potential tax advantages
You can claim a tax deduction for maintaining a rental property.
Excited by the prospect of lucrative rental income from a second home but wary of the hassles? Thanks to the internet, the landlord's job is as easy as it has ever been. Rules and regulations are at your fingertips, tenant screening is digital and affordable, and short-term renting is conveniently manageable via such services as AirBNB and Vrbo. In another article we describe what to know about making rental income from your home.
The Right Lender Can Help You With the Cash-Out Refinance and the Second Home
You may obtain enough money through a cash-out refinance to buy a second home outright, but chances are you will be taking on another home loan. The right lender—one who listens to your needs and creatively mixes your options to get you the best deal—can help you with both home loans.
Ready to explore your best cash-out refinancing options to buy a second home? Lendgo can match you to a high-quality lender today.
One strategy to get the most out of this two-loan situation is to rent out your current home while you look for a second home (staying with relatives or friends in the interim), because the rental income bolsters your overall income and can help you secure a lower interest rate for the second home. "If financing is required on the new home, the rental income you'd get on the existing [home] could be considered for qualifying on a new loan," says Bay Area real estate broker Michael Cheng, who has helped several clients find and buy second homes.
Take a couple of minutes to discover your top lender matches using Lendgo's powerful search platform. You will be that much closer to a great cash-out refinance to buy a second home!