Buying a Second Home

Can I afford a second home?

To see what loan amount you qualify for, multiply your total monthly household income by 0.38. This includes; salaried or commissioned income, 75% of the monthly rental income that you may be receiving from your primary multi-family residence, total positive cash flow from other investment properties, child support income from all children less than fifteen (15) years old, etc...

Subtract from this result your total monthly housing expense, rent or PITI, (principal, interest, property taxes, insurance and Private Mortgage Insurance and Condominium fees, if any), and then again subtract from this result your monthly property taxes, insurance, Private Mortgage Insurance and Condominium fees, if any, from the second home that you are looking to buy.

Next, subtract from this number your total household monthly debt repayments. I.e.: Monthly car payments, student loans, monthly minimum due credit card payments, 401 K. loans, alimony or child support payments due, total negative cash flow from investment properties, etc...

This result will give you the maximum monthly principal and interest payment that you qualify for. Multiply this result by one hundred and forty three (143), (for current rates). This will give you the maximum mortgage loan amount for which you can currently qualify for. Lastly, divide this final number by the Loan to Value of the transaction. (100% less the percentage of down payment that you are coming up with)

Sounds too complicated, let me give you an actual example. Let's suppose that your total yearly household income is $85,000, that you have a $300 per month car payment and that you have a $3,000 balance of unpaid revolving debt with a minimum payment of $100 per month. Your monthly PITI or rental expense is $ 1,200. (current residence payment)

You found the vacation home you love. You are willing to put down 20% as a down payment to avoid Private Mortgage Insurance (about $40 to $100 per month). The property taxes are $1,500 per year, or $125 per month, and you can get the property insured for a premium of $400 a year, or $33 on a monthly basis. $85,000 divided 12=$7,083 (monthly income) $7,083 times 0.38=$2,692 (PITI + debts) $2,692 less $1,200 less $300 less $100 less $125 less $33=$934 (PI). $934 times 143=$133,562 (loan amount) 100% less 20% down payment=80% (loan to value or LTV) $133,562 divided 0.80=$166,953 (qualified purchase price for a second home) If it still sounds too complicated, that is because it is.

Just give us a quick call at (800) 696-SAVE (7283). We issue written pre-approvals in ten (10) minutes or less, this includes the accessing of your credit history in seconds. This service is provided to you FREE of charge!

With most other lenders, second-home mortgage loans are made at no more than 80% loan-to-value. This means that the equity you put in must be at least 20% of the cost of the second home. The good news are that Baron Mortgage is much more lenient on qualifying ratios and loan to values. BMC finances up to 95% of the purchase price of the vacation home or 90% on an investment property, and a single family or condominium primary residence with NO MONEY DOWN.

All this with the lowest rates in New England according to Money Magazine and USA today. And you can close in twenty (20) business days or less from the time of application. If you are able to make this down payment and your cash flow is adequate to cover the mortgage payment plus property taxes, insurance, maintenance, and other related expenses (such as annual condominium fees), you can afford a second home. As a bonus, mortgage interest (up to a maximum of the interest on $1,000,000 of mortgage debt) and property taxes are tax deductible if you itemize on Schedule A.

Assuming the numbers work, this is an excellent time to buy a second home. Mortgage interest rates are about as low as they have been in twenty (20) years, and property values are also at what many people believe is the bottom of a long slump in real estate prices. If the financial calculations reveal that the costs of second-home ownership may crimp your lifestyle, consider purchasing a property to rent out when you are not using the place.

The tax rules for rental real estate are so complicated that you should discuss them with your accountant or financial advisor before making a final decision, but, in general, you can continue to deduct all mortgage interest and property taxes if you rent the home for more than fourteen (14) days a year and you personally use it for no more than fourteen (14) days (or 10% of the rental period, if that is greater). (This also assumes that your total adjusted income is not more than $150,000 per year.)

Otherwise, expense deductions must be offset by rental income. However, you can rent the place for less than fourteen (14) days a year and not have to pay tax on the rental income. Another quirk in the tax code allows you to purchase a recreational vehicle or a boat as your second home and still deduct the interest on the debt incurred to buy it. The only restriction is that the boat or motor home must contain kitchen and bathroom facilities. I hope this quick reference can assist you in determining whether it is the right time to buy a second home.

Sincerely,
Alex Doce

The information contained in this letter is for your reference use only, and is not a commitment of loans by Baron Mortgage Corporation. Not intended to render legal or financial advise. Mortgage Lender. MA Division of Banks ML 0194. NH Mortgage Banker 5547 Florida.