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Should I Finance a Second Home for Investment Purposes with a Fixed or Adjustable Rate Mortgage?A recent survey done by the National Association of Realtors (NAR) demonstrated that the second home market is much larger than anyone suspected. In fact 36 percent of all homes purchased last year were second homes. Even more surprising 23 percent of those were investment homes, while only 13 percent were vacation homes. However, many of those that own vacation homes also have investment property and second homes are quite frequently third, fourth or even fourteenth homes for serious investors. NAR President Thomas M. Stevens states Weve always known that a certain segment has invested heavily in the rental market, and some people earn their living simply by holding and managing investment property. What we see now is a crossover between largely vacation- and investment-home owners, with people recognizing the value of those investments and pouring more assets into real estate. So if youre looking at buying a second home for the purposes of investing, you are in good company. Financing Your Investment Property Of course this begs the questions of, Where do I get the money for a down payment? and Should I get a fixed rate mortgage or an adjustable rate mortgage. If you do not have the cash to put down on a second home, but have equity in your primary residence or other property you could utilize it in purchasing your investment property through a home equity loan or 2nd mortgage, and refinancing your current mortgage. Twenty-eight percent of investors with an investment property mortgage used their primary residences to procure down payment funds and you may be able to do the same. If you have not taken advantage of the lower rates since you purchased your primary residence, mortgage financing is something you should consider immediately while the rates are still low even if you are not looking at an investment. There are many options for securing a down payment and financing a second home and if you have the equity and your credit is good, certainly one will work for you. You just need to do a little research to find the best means of investing and be certain that you will be able to afford your payments. Down payments You will need a down payment of a minimum of 10 percent if you are purchasing investment property. If you do not have the cash available, refinancing or a home equity loan or 2nd mortgage on your primary residence may get you the money you need. The equity in your home is the fair market value of the property minus the amount you owe on the mortgage. This amount may be available to you through a home equity loan or home equity line of credit. Mortgage refinancing to cash out or extract the equity, is another way to put your home equity to work. Of course the better your credit, the better the rate on your second mortgage or mortgage refinancing. Once youve sorted out your investment property down payment you will have to decide which type of mortgage makes the most sense for your situation. Choosing a Mortgage Even if you have the cash to pay for your investment, there are benefits to having a mortgage. The main benefits are that interest payments and points are tax deductible. Owning property can be one of the best tax breaks you can get. The other benefit is that your cash is free to be used elsewhere. An adjustable rate mortgage can be a good decision if you plan on flipping the property and selling it within the next seven years, otherwise you are gambling on the interest rates. However, these loans offer less of a monthly mortgage payment and may allow buyers to qualify for a larger loan. Adjustable rate mortgages offer lower interest rates because they are linked to short-term interest rates. According to the Mortgage Bankers Association, the rate for an adjustable rate mortgage is as much as 3 percentage points less than a 30 year fixed rate mortgage. You can lock into a five-year adjustable rate for lower payments, but should feel confident that you will sell the property or can afford larger payments if the rate goes up in five years. A fixed rate mortgage gives you more security, but may mean higher payments. However, if you plan to keep the property indefinitely, a fixed rate mortgage will give you peace of mind. Your monthly mortgage payment will not change and can be worked into your budget. A fixed rate mortgage may also make sense if you are able to rent the property out at a rental rate of at least 1% of the propertys value to avoid a negative cash flow. If the property is certain to appreciate, you are in an even better position for the long-term. In a March article in the Los Angeles Times staff writers Tom Petruno and Kathy M. Kristof noted that real estate is still the number one choice of investment in California according to a Los Angeles Times/Bloomberg Poll. The writers state that when asked how they would invest most of a $1 million windfall, 36% of respondents picked real estate. With the right mortgage product, real estate may be the best investment for you as well. Just be sure to do a little research on the various choices and get several quotes for the adjustable rate mortgage or fixed rate mortgage that you choose. Rebecca K. OConnor is the author of nine books on a variety of subjects including endangered animals, natural disasters and popular culture. She is also a regular contributor to Bird Times, 92260, Desert Magazine and has written for many other publications including Los Angeles Times Magazine. Rebecca is known for her informative real estate finance articles. You can read more of Katherines articles at http://www.bdnationwidemortgage.com and get more information about home equity loans and second mortgage. For a complete look at loans and rates please go to http://www.bdnationwidemortgage.com/second_mortgage.html More Useful Resource and Updates on debt consolidation loans mortgage loan home improvement
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