By Steve Tytler
Question: We are buying a second home in Arizona because home prices down there are so cheap right now. We are debating whether we should combine the loan with our first mortgage on our home in the Seattle area or have two loans. What are the pluses and minuses. We also may rent out the Arizona house until we sell in this area and move to Arizona in 2 to 5 years.
Answer: There is no right or wrong answer to this question, it just depends on your personal financial needs and goals.
So let's consider the pros and cons of each possibility.
A strong reason to get a mortgage on the house you are buying in Arizona is that mortgage rates are at historically low levels.
In most cases, the mortgage interest rate for a second home is the same as the rate on a primary residence. You can get a 30-year fixed-rate mortgage in the low 4 percent range. Those rates are so low that you should not pass them up -- unless you plan to own your home in Arizona free and clear of any mortgage.
If you do, then you are probably better off taking out a loan on your current residence and paying it off when you sell your Seattle home. I have a friend in the mortgage business in Phoenix and he tells me that about one-third of all home purchases there are cash sales with no mortgage because home prices are so low. Prices have fallen 50 percent to 60 percent in some areas of Arizona since the peak of the housing bubble. That's bad news for the homeowners, but a great opportunity for home buyers with cash to spend.The biggest obstacle to overcome in getting a cash-out refinance on your Seattle home is whether you have enough equity after the drop in home values here.
You can borrow up to 80 percent of your home's market value (as determined by an appraisal) without having to pay mortgage insurance, which adds to the monthly payments on the loan. To get the absolute lowest possible mortgage rate, you would need to keep the loan balance under 60 percent of your home's value.
That would save you about 0.25 percent on the interest rate compared to a loan for 80 percent of the value.
The amount of money that you could borrow to buy a home in Arizona depends on the value of your home minus the mortgage balance. For example, if your home is worth $400,000 and you owe $100,000 on it, you could borrow $240,000 which would be 60 percent of its appraised value for the best possible interest rate. That would give you $140,000 (minus loan costs) to spend on a house in Arizona. Or you could borrow $320,000 (80 percent of the home's value) at a slightly higher interest rate which would give you much more money to spend on a second home. But if you owed $300,000 on that same $400,000 home you would have almost no equity to work with to get a cash-out refinance. So it all depends on the equity in your home.
If you have plenty of equity and you want to own your home in Arizona free and clear, doing a cash-out refinance would make sense.
Another option is to finance the purchase of the second home in Arizona by making a down payment of 20 percent or more to avoid the additional monthly expense of mortgage insurance and then paying off that mortgage when you sell your Seattle area home, assuming you have a large enough net profit from the sale of your home.
The good news is that the rental market is very strong in Phoenix because so many people have lost their homes and have become renters. So if you have to borrow the money on the house in Arizona, you can probably earn enough rent to cover the monthly mortgage payments until you retire and move south.
As I said at the beginning, there is no right answer, I hope these ideas help you make a decision.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
Answer: There is no right or wrong answer to this question, it just depends on your personal financial needs and goals.
So let's consider the pros and cons of each possibility.
A strong reason to get a mortgage on the house you are buying in Arizona is that mortgage rates are at historically low levels.
In most cases, the mortgage interest rate for a second home is the same as the rate on a primary residence. You can get a 30-year fixed-rate mortgage in the low 4 percent range. Those rates are so low that you should not pass them up -- unless you plan to own your home in Arizona free and clear of any mortgage.
If you do, then you are probably better off taking out a loan on your current residence and paying it off when you sell your Seattle home. I have a friend in the mortgage business in Phoenix and he tells me that about one-third of all home purchases there are cash sales with no mortgage because home prices are so low. Prices have fallen 50 percent to 60 percent in some areas of Arizona since the peak of the housing bubble. That's bad news for the homeowners, but a great opportunity for home buyers with cash to spend.The biggest obstacle to overcome in getting a cash-out refinance on your Seattle home is whether you have enough equity after the drop in home values here.
You can borrow up to 80 percent of your home's market value (as determined by an appraisal) without having to pay mortgage insurance, which adds to the monthly payments on the loan. To get the absolute lowest possible mortgage rate, you would need to keep the loan balance under 60 percent of your home's value.
That would save you about 0.25 percent on the interest rate compared to a loan for 80 percent of the value.
The amount of money that you could borrow to buy a home in Arizona depends on the value of your home minus the mortgage balance. For example, if your home is worth $400,000 and you owe $100,000 on it, you could borrow $240,000 which would be 60 percent of its appraised value for the best possible interest rate. That would give you $140,000 (minus loan costs) to spend on a house in Arizona. Or you could borrow $320,000 (80 percent of the home's value) at a slightly higher interest rate which would give you much more money to spend on a second home. But if you owed $300,000 on that same $400,000 home you would have almost no equity to work with to get a cash-out refinance. So it all depends on the equity in your home.
If you have plenty of equity and you want to own your home in Arizona free and clear, doing a cash-out refinance would make sense.
Another option is to finance the purchase of the second home in Arizona by making a down payment of 20 percent or more to avoid the additional monthly expense of mortgage insurance and then paying off that mortgage when you sell your Seattle area home, assuming you have a large enough net profit from the sale of your home.
The good news is that the rental market is very strong in Phoenix because so many people have lost their homes and have become renters. So if you have to borrow the money on the house in Arizona, you can probably earn enough rent to cover the monthly mortgage payments until you retire and move south.
As I said at the beginning, there is no right answer, I hope these ideas help you make a decision.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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