Avoid Getting Stuck Paying Two Mortgages When Buying Your Next House
By Ilona Bray, J.D.
If you plan to sell your home and buy another, which should you do first? If you sell first, you’ll be under time pressure to find another house quicklyand could end up settling for less than you wanted, overpaying, or stuffing yourself and all your possessions into a hotel room until you can buy a new place. But, if you buy first, you’ll have to scramble to sell your old housea particular problem if you need to get top dollar on your old house in order to make the down payment on the new one. And owning two houses at once is no treat, even if it’s for a short time. You’ll have to worry about two mortgagesin the unlikely event that a lender is even willing to offer you a mortgage for a second house before you’ve sold the firstas well as twice the maintenance, and the security issues that come with leaving one house empty.
Here are ways to minimize the financial and psychological downsides of selling one house while trying to buy another.
Not Checking Credit Reports And Correcting Errors
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
How to avoid this mistake: You may request a free credit report each year from each of the three main credit bureaus. You may dispute any errors you find.
What Happens If I Want To Move House And Have A Second Charge Mortgage
If you want to sell your home, theres a couple of options. If your first and second charge mortgages are portable, youll be able to switch them to your new home while staying with your current lenders.
Another option is to repay both mortgages when you sell your property and take out a new, single mortgage on the new property. Whether you could do this would depend on the conditions of both mortgages and any early repayment charges youd need to make. Talk to your mortgage advisor about the best option for you.
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How Much Will Lenders Be Willing To Offer On A Second Charge Mortgage
The amount you can borrow with a second charge mortgage depends on the equity you have in your property. The equity is the value of your home, minus the mortgage you owe.
The amount lenders offer can vary, but between 75%-100% of the equity is a good starting point.
Youll need to find out how much equity there is in your current home and decide how much money youd like to borrow against it.
Cons Of A Second Mortgage
- Second mortgages have higher interest rates. Second mortgages often have higher interest rates than refinances. This is because lenders dont have as much interest in your home as your primary lender does.
- Second mortgages might put pressure on your budget. When you take out a second mortgage, you agree to make two monthly mortgage payments: one to your original lender and another to your secondary lender. This can put a strain on your household finances, especially if youre already living paycheck to paycheck.
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How Much Stamp Duty Will I Have To Pay
If youre buying a second home, youll need to factor it into the final amount you need to borrow. However, there are some cases where properties are exempt from Stamp Duty. This includes:
- if the property is worth less than £40,000
- if it moves for example, a caravan, houseboat or mobile home
- If youre planning on living in your new home but dont sell your first right away, you may be able to claim a refund if you sell your previous home in under 36 months.
Stamp Duty is calculated differently on a second home or buy-to-let. Thats true even if youre planning to make your second home your primary residence.
So its important to know how its calculated, and how much you can expect to pay. This will depend on the value of the property.
In response to the current COVID-19 crisis, the government has changed the Stamp Duty on the purchase of a residential property between 8 July 2020 to 31 March 2021. These rates apply whether youre buying your first home or have owned property before:
- 0% for properties up to £500,000
- 5% for the portion between £500,001 and £925,000
- 10% for the portion between £925,001 and £1.5 million
- 12% for portion above £1.5 million.
- So if youre buying a property of £1 million, youll have to pay the following Stamp Duty:
Buying Your Second Home Getting A Mortgage Might Be Trickier Than You Remember
Its not just first-time buyers who face the hurdle of affordability tests when applying for a mortgage.
If youre a second stepper, saving for a deposit was probably the biggest challenge you faced when buying your first home.
Now rising house prices are motivating first-time owners to use the extra equity to make a move to a bigger or better home.
Almost half are thinking of selling up and moving to a new property thanks to record low rates on mortgages, according to a report by Lloyds Bank.
But rule changes last year mean even with a decent deposit, anyone wanting to get a new mortgage now has to prove they can afford monthly payments both now and in the future.
If youre planning on buying your second home, these are the three factors the mortgage provider will use to help it decide what to offer.
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Personal Loans And Remortgaging
If you need to borrow a small amount of money, you might be better off going for an unsecured product, such as a personal loan.
If you dont have a large early repayment charge on your current mortgage, you have some equity in your home and your circumstances havent changed, you could be better off remortgaging.
Check Your Credit Score
Checking your credit score will help you determine your financing options lenders use it to set your loan pricing and see if youre able to repay your mortgage. The better your credit history, the better the chances youll have of securing financing with the best terms and rates.
How to get started: You can get your credit report and score from each of the three major credit reporting agencies, Equifax, Experian and TransUnion, for free once a year. Your bank or credit card company might offer free access to your score or credit report, too.
- Consider how different credit score ranges impact your interest rate, monthly payments and total interest. In general, the lower your credit score, the more expensive your mortgage will be.
- Pull your credit reports from each of the credit bureaus for free every 12 months at AnnualCreditReport.com. If you discover any discrepancies, contact each agency and report the error.
Setting a realistic budget for your new home will help inform what you can afford and how much your all-in costs will be.
How to get started: The purchase price isnt the whole picture. Carefully factor in other expenses to determine what you can afford.
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Costs Of Buying A Second Home
There are the usual costs that you paid with your primary residence, including legal fees, building insurance and an arrangement fee.
You will also need to consider:
1. Stamp duty
Stamp duty is more expensive when you buy a holiday home or a buy-to-let property than buying your main home.
For additional properties you have to pay a stamp duty surcharge of 3%. This is charged on top of stamp duty tax.
Make sure you will be able to keep on top of a second set of bills, such as:
When To Buy And Sell A House At The Same Time
Be sure you give yourself time to review the pros and cons involved in buying and selling your home. To avoid potentially digging a financial hole, analyze your capabilities. Do you have enough cash for a down payment? Could your budget handle two mortgages for a short time? If the answers are yes, you may be good to go!
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Is Now A Good Time To Buy A House
Yes and no. Mortgage rates reached record lows in early 2021 and have stayed low by historical standards throughout the year even as they fluctuated. However, strong demand for homes pushed prices up and frustrated many potential homebuyers. According to the CoreLogic Case-Shiller Home Price Index, property prices rose by 18 percent between September 2020 and September 2021. Time may be running out to lock in an affordable mortgage, because experts predict interest rates will continue to trend upward this year. In many areas of the country, Realtors reported intense competition for homes last year, with some properties getting dozens of offers and going into contract within days of being listed.
That reality has created inevitable concerns about buying at the peak. Home values go up over time, but there is a possibility that prices in some places have hit a plateau.
I would be careful about buying near the top of the market, especially if I want to be in the home for only a few years, says Ken H. Johnson, a real estate economist at Florida Atlantic University and co-author of the Beracha, Hardin & Johnson Buy vs. Rent Index. If you look to buy, bargain aggressively and be willing to walk away. Real estate most definitely is a good investment, but dont just buy now because thats what everybody else is doing.
Be Ready To Define How You Will Use The Home
Assuming your current home continues to be your primary residence, you will need to tell the mortgage lender how you will use the additional home. Lending underwriters must follow the guidelines of Fannie Mae and Freddie Mac, the government-sponsored enterprises that back about 70% of single-family home mortgages. Lenders consider properties that are used as second homesrather than as investment propertiesto be less risky, which means you may be able to qualify for a lower interest rate.
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A Second Mortgage Is A Tool Use It As Such
Second mortgages offer you the opportunity to use the equity in your home for a number of different situations. If you have bad credit and need to consolidate debt, pay off other loans, renovate your home, invest, a downpayment on your next property, funds to support yourself while selling, paying off property or tax arrears, or need emergency funds, a second mortgage is a great tool for Canadians to improve their financial well-being. Be sure to consult the right mortgage professional in your area to discuss your specific situation, and how a second mortgage can help you.
How To Balance Buying And Selling
As a first-time homebuyer, your only focus is on purchasing a home. When you already own a home and you’re thinking of moving, you’ll need to decide the timing of buying your new home and selling your existing one. Here are some factors to consider:
- Will you need the profits from the sale of your first home to put towards the down payment on your second home?
- How comfortable would you be having to carry two mortgages in case you couldn’t sell your first home?
My husband and I found our ideal next home very quickly, so we made an offer on it first with the intention of selling our current house simultaneously. We tried to find ways to protect ourselves from buying a house we couldn’t afford or getting stuck carrying two mortgages.
Before making an offer on the new place, we inquired with our realtors how much we could realistically sell our first house for based on the current market. This not only gave us confidence that we could sell our house at a good price, but it also helped us figure out if we could afford the new house and what purchase price we were comfortable offering.
We also made our offer conditional on the sale of our first home. In a hot market, you may feel pressure to make an offer that’s not conditional, but consider if you’re really comfortable taking the risk of carrying two mortgages for a period of time.
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Why Do People Take Out A Second Charge Mortgage
A second charge mortgage might help you cover a number of things including:
- Home improvements
- Debt consolidation – but remember, if you’re consolidating debts like personal loans and credit cards, it means youll be switching from unsecured debts to one that could put your home at risk of repossession. Second charge mortgages can run up to 25 years, so you could also end up paying more overall.
Whatever your reason for taking a second charge mortgage, make sure you understand the costs involved and are confident you can afford them – your home or property may be repossessed if you do not keep up repayments on your mortgage.
Youre Buying Home #2 After Selling Home #1
Maybe youre planning on selling your current home before buying a new one. The significant benefit of this strategy is that youll know exactly how much equity is available to put toward your new home. And dont discount the fact that it can be infinitely less stressful to finish one transaction entirely before diving into the next. Still, it may not be so clean-cut: Any gap between closing dates could force you to find short-term accommodations, and those costs can add up. Here are a few tips on dealing with that situation:
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Get Advice From An Expert In 2nd Time Buyer Mortgages
If you have any questions about what your mortgage options might be as you prepare to make the move and want to speak to an expert for the right advice, get in touch and well match you with an expert who specialises in second-time buyers.
Finding the right expert could help you save time and money in the long run, and this is where we come in. Our free broker-matching service will assess your needs and circumstances before pairing you up with an advisor with the expertise you need.
Call us on 0808 189 2301 or make an enquiry online and well set up a free, no-obligation chat between you and a second-time buyer mortgage specialist today.
Ask a question
We can help!We know everyone’s circumstances are different, that’s why we work with mortgage brokers who are experts in Second-Time Buyers MortgagesAsk us a question and we’ll get the best expert to help.
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The Financial Conduct Authority does not regulate some forms of buy to let mortgage.
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Second home mortgages are for people who are looking to purchase a second property for their own use as a holiday home, to be closer to work during the week or for a family member, for example rather than to rent out, in which case you would need a buy-to-let mortgage.
It works in the same way as a first mortgage, only with stricter affordability checks, because paying for a second mortgage could add significant financial strain.
So, if you want to get a mortgage for a second home you need to be sure your finances are in good order. You might be coming to the end of making your repayments on your first mortgage and feel you could comfortably take on a second home loan, for example.
You can use a second home mortgage calculator to see how much you could borrow and what the repayments are likely to be.
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What Is The Process For Getting A Second Home Mortgage
You will go through all the same financial assessments as usual but the mortgage provider will be extra cautious about lending to you, as youll be making two mortgage repayments every month instead of one.
As with all mortgages, the loan is secured on the property. This means that if you can’t keep up with repayments on your second mortgage the lender can seize it to sell it and get its money back.
Is It Possible To Combine Your Mortgage & Second Mortgage At 100% Ltv
The process of getting another home loan when you already have one is similar to the process you went through for your first mortgage. The tricky part is that your rosy picture as a mortgagee has changed significantly. Since you already have one mortgage, lenders review your financial situation very closely before being willing to fund a second mortgage.
If you meet the lenders requirements, you can get a second home loan even if you already have one.
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The Bottom Line: Is A Second Mortgage Right For You
Second mortgages are a lien taken out on a portion of your home that’s been paid off, which is called equity. When you take out a second mortgage, your lender may give you a single lump-sum home equity loan or a revolving line of home equity credit. If you cannot pay back your second mortgage, your lender can take your home.
Second mortgages are different from refinances because they add another monthly payment to your budget instead of changing the terms of your current loan. Second mortgages are usually more difficult to get than cash-out refinances because the lender has less of a claim to the property than the primary lender. Many people use second mortgages to pay for large, one-time expenses like consolidating credit card debt or covering college tuition.
Its a good idea to consider all of your options and be sure you can keep up with payments before you choose a second mortgage. Whether you decide to take out a second mortgage or refinance, consider reaching out to a Home Loan Expert today.
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