Tips for financing a second homeJoseph Badalinvestment property, portfolio lender, finance, interest-only loan
Today, it's surprisingly easier for the financially
sophisticated homebuyer to find a mortgage product that allows him
to finance a second home or investment property that fits his
sometimes complex financial profile. To find many of the innovative
loan products and services below, it's best to seek out a portfolio
lender (a lender that does not sell the loans it originates or
acquires). More often than not, portfolio lenders offer greater
flexibility in financing a second property.
The top products
One of the most popular ways to finance a second home or
investment property is through the use of an adjustable-rate
mortgage (ARM). ARMs typically offer lower interest rates than
traditional fixed-rate mortgage products. For borrowers wishing to
have more certainty about their monthly mortgage payments, hybrid
ARMs may be a particularly useful option. With hybrid ARMs,
borrowers can select a period of time - three, five, seven or 10
years - during which their mortgages have fixed interest rates.
Since most homeowners change the terms of their mortgages (via
refinances) or sell their homes every six years, the 7/1 hybrid ARM
is often an ideal financing tool.
Another feature used by many second-home purchasers is an
interest-only loan. Interest-only loans allow borrowers the option
of selecting to pay only the interest on their loans, which greatly
reduces monthly payments. Best of all, some mortgage lenders do not
charge borrowers penalties for making prepayments on their loans,
so homeowners who receive variable income (commissions or yearly
bonuses) can opt to make interest-only payments for much of the
year and then apply their commissions or bonuses to the principal
without penalty.
Some portfolio lenders also offer pledged-asset loans, which
allow borrowers to pledge eligible securities to the lender instead
of making down payments. A borrower can finance up to 100 percent
of the purchase price or acquire a cash-out refinance up to 100
percent of the appraised value of a home by pledging marketable
securities. This is a wonderful alternative to liquidating assets
to come up with a down payment when purchasing a new home. This
avoids capital gains taxes on the liquidation of securities, allows
the investments to continue to work for you and, in the case of
loans with more than 80 percent loan-to-value, avoids the expense
of mortgage insurance.
Borrowers and their financial intermediaries should seek out
portfolio lenders that specialize in such innovative financing
strategies and offer an unmatched level of partnership
collaboration with homebuyers.
Joseph Badal is the senior executive vice president and
chief lending officer of Santa Fe, N.M.-based residential mortgage
lender Thornburg Mortgage. He may be reached at (888) 898-8698 or
e-mail
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[email protected].
