Considering a Second Mortgage? What to Know Before Buying a Second Home

If you’re looking to buy a home but already live in one, chances are you’re navigating the tricky situation of holding two mortgages simultaneously. Many buyers and sellers struggle with this balancing act, but there are ways you can manage and use it to your advantage.

A double mortgage is often temporary for traditional homeowners, but that doesn’t mean it comes without risks. These experts offer advice on how to prepare for this time to ensure success.

“Ultimately, it is very important to try to foresee all the financial ramifications and to factor in any potential delays that will add to financial costs,” says Svetlana Choi, a broker with Coldwell Banker Warburg.

Buying a New Home Before You Sell

If you’re a current homeowner looking to purchase your next home, you know timing is everything. In some cases, you might find your dream home before your current home sells, or you might decide to buy your second home before even listing your current one.

In these scenarios, there are a few things to keep in mind.

Consider Your Finances

“The risk and challenge is that it may cause some financial constraints, especially if it takes you a bit longer than you were financially able to hold when carrying both mortgages,” says agent Alana Lindsay of Coldwell Banker Warburg.

Estimate a Timeline

Play out all of the scenarios and timelines that could take place if you choose to buy before selling.

Take into account the current market for buyers as well. How long will it take to search for a new home, and how realistic is your wish list, given your budget?

The Risks

If you qualify to carry two mortgages, you aren’t yet out of the woods. If you buy a second home, you need to focus on selling your existing home quickly to avoid carrying the double mortgage for long.

“The risk of having a double mortgage is that the house does not sell as fast as you expected, and you are making more payments than anticipated,” says Jessica Duncan, a realtor with Better Homes and Gardens Real Estate Main Street Properties.

“The challenges are ensuring you qualify for both mortgages and planning for your down payment before selling your house. Some loan programs, such as FHA, will only allow you to have one FHA mortgage at a time.”

Pending delays or complications with your sale, you could also find that your next purchase is affected.

“That carrying cost is factored into your debt-to-income ratio, which the bank will use to see how much of a mortgage you would be able to get a loan for,” Lindsay explains. “So, that first mortgage will limit the amount of a loan you can qualify for on the second go-round.”

Buying a home can be a challenge, even if selling is easy. “Many customers don’t want to move unless they find the perfect house to fit their needs,” Duncan says. “The ability to find the right home for you while not under a timeline or pressure could be a great reason to consider moving forward with a double mortgage.”

The Benefits

“The potential benefit is a smoother sale of your current home because it can be very hard to successfully show a unit over and over again when the sellers live there; it limits showing availability,” says Lindsay. Having your first home empty for prospective buyers could mean it sells faster.

“The second benefit is the ability to stage the home properly. Instead of personal items and photos, the stager has a blank slate to show off the home’s benefits, where a buyer can imagine the home as their own and not feel like they are inside someone else’s home,” Duncan says.

How to Decide if a Second Mortgage is Right for You

If you’re wondering about this option, do your homework.

Get a Pre-Approval From a Lender

“Getting pre-approval from a lender is a good first step,” says Merav Bloch, vice president and general manager of Opendoor Exclusives. “I also encourage aspiring buyers to shop around for different financing options, rather than defaulting to their current lender—doing your research will help you score the best possible rate and learn about options to reduce your monthly payment, like rate buydowns.”

Take a Look at Your Budget

“A good strategy would definitely be to make sure that you factor in how long you can carry both [mortgages] with your current job and or salary,” Lindsay suggests. “Is it 6 months? Is it 12 months? Your banks may also have financial products for you to review that may help, but that question is best asked of a mortgage loan officer or mortgage broker.”

Research the Current Housing Market

While many real estate experts say that the right time to buy or sell a home is when you’re ready and not when the market says you should, there are some realities to contend with when carrying two mortgages.

“The current real estate market affects carrying two mortgages based on inventory and the mortgage environment. When it’s a good time to sell, it is not necessarily a good time to buy,” Lindsay says. “When it is a good time to buy, it is not necessarily a good time to sell. They will have to contend with that. They also have to contend with the mortgage environment, which impacts the real estate market, and the interest rate they are going to get on their loan.”

Prepare for a Worst Case Scenario

There is help for some homeowners in these scenarios. “Some lenders will offer bridge loan programs to help a buyer use some of the equity in their current home for the down payment and closing cost to purchase a new home,” Duncan says.

Consider Long-Term Benefits vs. Short-Term Risk

“With all of that said, moving is always a major life decision, as well as a financial one, typically triggered by milestones like moving for a new job, having a new baby, or retiring and moving closer to the grandchildren,” Bloch says. “If your need to move is marginal, it might not make sense to take on the burden of a double mortgage. On the other hand, avoid being penny-wise, pound-foolish. If, for example, you’re moving for a major promotion that will unlock new opportunities for your family, then the short-term stretch may be well worth it.”

This article was written by Kristine Gill from Better Homes and Gardens and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].