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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 [email protected]