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How to finance a second home

Dear Dr. Don,
Can you tell me the difference in mortgage options when buying a second property or land for a summer/retirement home? Thanks.
-- Sheila Shangri-la

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Dear Sheila,
Land loans are a different breed of cat than a mortgage loan on a second home. A vintage Dr. Don column, "Land loans," discusses financing land in greater depth.

As to your mortgage options, you really have the same range of options that you would have with the mortgage on your primary residence, at least when it comes to choosing between the mortgage term, fixed versus adjustable interest rates and interest-only versus self-amortizing loans.

The underwriting standards for a second home can be somewhat different than what is required for the mortgage on a primary residence. What I mean by that is the lender might require a larger down payment or add a risk premium to the mortgage interest rate because the home isn't your primary residence. The Bankrate feature, How to buy a second home, has some good tips on both buying and financing a second home.

My advice is to take the big-picture view of what you're trying to accomplish. If it's going to be a stretch to carry two mortgage payments, then an interest-only loan might be useful. If you eventually plan to sell the primary residence and retire to the second home, then you can plan on using the proceeds to pay down or pay off the mortgage on the second home. Build in some financial flexibility so you don't become house rich and cash poor. Send me a post card.

Bankrate.com's corrections policy-- Posted: Dec. 29, 2005
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