Can I Afford a Second Home: Second Home Mortgage Calculator | Pacaso (2024)

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Published Date: November 16, 2023

Can I Afford a Second Home: Second Home Mortgage Calculator | Pacaso (1)
If you’re thinking about purchasing a second home, you’ll want to answer the question “Can I afford a second home?” first before you fall in love with a vacation property that’s out of reach.Our second home mortgage calculator can give answers to that question and more — with no complicated math needed from you. You’ll also want to read through our list of five key considerations about buying a second home that go above and beyond the numbers.

How to use the second home mortgage calculator

This easy-to-use calculator breaks the number-crunching down into a few steps. Simply plug in details about your total monthly income and debt obligations, then continue on to determine how much you can afford. The calculator is only as accurate as the numbers you put in, so try to be as exact as possible with your current financial status. Let’s walk through the steps:

Step 1

On the first screen, you’ll input some of your financial data to calculate your monthly debt-to-income ratio. As you do, here are the figures you’ll be asked to enter:
  • Employment income: This is the amount of money you receive from your primary job per month before taxes are withdrawn.
  • Supplemental income: Add any money outside of your primary income that you can reliably depend on from month to month. Rental income is a common form of supplemental money, as are investment earnings, child support and alimony.
  • Current total monthly mortgage payment: This is how much you spend every month on the mortgage amount for your primary residence. For an accurate representation of your monthly costs, you’ll want to include property taxes and homeowners insurance — not just the principal and interest portions of your mortgage payment.
  • Total monthly housing expenses: Enter how much you spend each month on other household-related costs, like utilities and maintenance.
  • Monthly debt payments: Total up other monthly payments that go toward debt obligations. This includes things like car payments, credit cards, home equity loans or student loans.

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Step 2

On this screen, you’ll see your current debt-to-income ratio (DTI). A commonly used term in real estate lending, DTI is calculated by dividing your monthly debt obligations by your gross monthly income. The lower your DTI, the more favorable you will be seen by mortgage lenders.This screen also shows you your estimated cash on hand. This is the amount of money you have left over each month after deducting recurring expenses.

Step 3

This step helps you figure out how much you can afford to spend on a second home. You’ll be asked to input the following information:
  • Second home down payment: This is the amount of money you’re willing to pay upfront for the home. A larger down payment (20% or more) usually results in a lower interest rate.
  • Second home mortgage rate: This is the rate of interest charged by your lender. You’ll want to do some quick research on current interest rates. Note that interest rates on second homes tend to be a bit higher than on primary residences.
  • Mortgage loan length: This is the number of years it will take to pay off your loan. The longer the loan, the higher the interest rate.

Step 4

Here, you’ll see your results. Based on all your inputs, you’ll see how much you can afford to spend on a second home. If you’d like to explore Pacaso second homes, you can simply click “View listings” and check out the homes that are available within your housing budget.Now that you’ve done the math, let’s explore how you can make second home ownership work for you.

5 factors to consider when buying a second home

Since lenders make money off of interest rates, they are incentivized to offer the highest amount possible to a home buyer. Just because you may qualify for a large loan doesn’t mean it’s in your best interest to accept it in full.Remember that in addition to monthly mortgage payments, second home owners are still responsible for:
  • Annual property taxes
  • Homeowners insurance
  • Utility payments
  • Possible homeowners association fees
  • Regular maintenance
  • Mortgage insurance (if your down payment is less than 20%)
These added expenses can easily cut into your cash on hand. That’s why it’s important to figure out how much you can afford for a second home by using our second home mortgage calculator, also known as a vacation home mortgage calculator.For added help in getting the right mortgage loan, read the following five tips.

1. Know your financing options

Can I Afford a Second Home: Second Home Mortgage Calculator | Pacaso (11)
Knowing how you plan on paying for your home will help determine what you will be approved for. Here are some of the common routes home buyers take:
  • Home equity loan: Also known as a second mortgage, home equity loans allow you to borrow against the current equity you have in your home. They provide a lump sum of cash or line of credit for you to make a purchase. If your property loses value, you may owe more on the loan than the property is worth.
  • Conventional loan: You can receive these loans through traditional lenders like banks and credit unions. Just like your primary mortgage, you’ll make monthly payments of principal and interest until your loan is paid off.
  • Cash: Paying for a home in full will reduce the overall cost of owning a second home because you won’t be paying interest on a loan.
The purchasing method that’s right for you will largely depend on your current financial status, which we’ll get into next.

2. Revisit your current financial status

Can I Afford a Second Home: Second Home Mortgage Calculator | Pacaso (12)
Lenders want assurance that you will be able to uphold the terms of your loan, so they’ll look at your current financial situation.Considering purchasing a second home? A key financial metric to assess is your debt-to-income (DTI) ratio. To comfortably afford a second property, your DTI should ideally not exceed 45%.While this threshold is a general benchmark, having a favorable credit score, a substantial down payment or considerable cash reserves can provide added flexibility. Ensuring that these financial parameters are in check will guide you in making an informed decision about acquiring a secondary residence.Typically, you will need to have a favorable credit score, as anything below 640 could result in a rejected application.

3. Understand second home mortgage requirements

The second home buying process is similar to buying a primary home, but it does have stricter requirements. Along with having higher interest rates — usually 0.5% to 1% higher — second home mortgages usually require larger down payments, too. This is due to the greater financial burden a vacation home places on the owner.The rule of thumb is that your housing and debt payments should add up to 36% of your pre-tax income at most. Sticking to this guideline can prevent you from being “house poor,” which means tying the majority of your income up in housing expenses and leaving little cash on hand for unexpected expenses, either related to your second home or not.Be prepared to pay at least 10% of the second home’s value as a down payment. This is substantially higher than the rate for a primary mortgage due to the added loan risk.

4. Know your options for second home ownership

Can I Afford a Second Home: Second Home Mortgage Calculator | Pacaso (14)
Getting a second home mortgage may be out of reach if your goal is to become the sole owner, but that’s not your only option. Pursuing co-ownership can make up for shortcomings in your financial status and get you into the second home of your dreams.Purchasing your home through a co-ownership model like Pacaso can also provide many benefits that you’d miss out on with traditional methods. For the price of a mid-tier home, for example, you can have a share in a luxury home with all the benefits that come with it, like top-of-the-line amenities, high-end furnishings and a prime location. You’ll simply share ownership with up to seven other owners as part of a multi-member LLC.Pacaso manages the property for you, ensuring it’s flawlessly maintained and stocked with the essentials you need for a relaxing stay. This sort of turnkey ownership allows you to bypass the common hassles — and big price tag — of owning a whole second home on your home on your own.

5. Learn how to increase your borrowing power

Can I Afford a Second Home: Second Home Mortgage Calculator | Pacaso (15)
After evaluating your finances, you may find that you don’t meet the requirements for purchasing a second home at the moment. The good news is that you have the power to increase your appeal to lenders with just a little time and strategy.
  • Offer a larger down payment. Your current income may be fixed for the time being, but if you have enough savings, you can pay a greater percentage of the house purchase price in cash. This will reduce your monthly payment and make your loan less risky to lenders, which may give you access to a lower interest rate.
  • Improve your credit score. Higher credit scores mean lower interest rates, keeping more money in your pocket every month. Paying debts, including credit cards, on time has the biggest impact on your score, but utilizing 30% or less of your credit line also plays a big role. Or you can try consolidating your debts so that you’re only dealing with a single payment that might have a lower interest rate.
  • Improve your DTI. If your current debt-to-income ratio exceeds 43%, focus on paying off some of your debts or finding ways to increase your income, or both.
  • Reduce unnecessary spending. Small, individual expenses like eating out add up fast. What small (or not-so-small) luxuries are you willing to forgo in order to secure your second home? If you’re struggling to save for a down payment, take a look at your everyday spending habits and see where you can cut back or find more affordable alternatives.
Applying these strategies can put you in better standing to get an affordable loan in the near future or down the road.

Track your progress over time

Still wondering, “Can I afford a second home?” Even if the answer isn’t a yes right now, you have the power to change it. Bookmark this calculator and come back to recalculate based on your progress.When you’re ready to make a second home purchase, Pacaso will be ready to help you through the process and find you the house of your dreams.

Frequently asked questions about financing a second home

Can I use a mortgage to pay for a second home?

Yes, there are fixed-rate and adjustable-rate mortgages available for a second home purchase. Whether you can use a mortgage to buy a vacation home depends on your ability to qualify. If you have a mortgage on your first home, you’ll need to show the lender that you can afford to take on a second monthly payment. The application process will include checking your credit profile and credit score and calculating your debt-to-income ratio.

Can I deduct mortgage interest on a second home?

Generally, second home owners can deduct mortgage interest on a loan of up to $750,000, as long as you use your second home for personal use — meaning, you don’t generate any rental income. The rules can be complicated, so check with your tax professional.

Can FHA or VA loans be used for second home purchases?

No. Government-backed loans like FHA loans and VA loans can’t be used for second home purchases. They’re designed to help make it more affordable to buy a primary residence.

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Can I Afford a Second Home: Second Home Mortgage Calculator  | Pacaso (2024)

FAQs

How do you calculate if you can afford a second home? ›

A key financial metric to assess is your debt-to-income (DTI) ratio. To comfortably afford a second property, your DTI should ideally not exceed 45%. While this threshold is a general benchmark, having a favorable credit score, a substantial down payment or considerable cash reserves can provide added flexibility.

How much 2nd mortgage can I qualify for? ›

Qualifications for second mortgages vary, but many lenders prefer that you have at least 15 percent to 20 percent equity in your home. You can typically borrow up to 85 percent of your home's value, minus your current mortgage debts.

How do people afford second homes? ›

You can choose from the following: A home equity loan (from your current property) A second home mortgage. A home equity line of credit (HELOC) on your existing property.

Do you have to put 20% down on a second home? ›

How much do I need for a down payment on a second home? The down payment for a first home can be as low as 0% and as high as 20% for a conventional loan. But the required down payment for a second home is around 10%, and sometimes more than 20%.

How do snowbirds afford two homes? ›

If you're someone who would be reliant on rental income to afford your second home, you may want to opt for a series of seasonal rentals you return to year after year.

How to buy a second home without selling the first? ›

How can I buy another house without selling my first? To buy another house without selling your first, explore options such as obtaining a HELOC or line of credit on your existing property. These approaches leverage the equity in your current home to fund the purchase of a second property.

Is it difficult to get approved for a second mortgage? ›

To be approved for a second mortgage, you'll likely need a credit score of at least 620, though individual lender requirements may be higher. Plus, remember that higher scores correlate with better rates. You'll also probably need to have a debt-to-income ratio (DTI) that's lower than 43%.

What is the 2 2 2 rule for mortgage? ›

One Spouse's Income Doesn't Meet Requirements

Many lenders use the 2/2/2 rule to evaluate loan eligibility, which typically requires: 2 years of W-2s. 2 years of tax returns. 2 months of bank statements.

Is it harder to get a loan for a second home? ›

Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage. Your interest rate on a second mortgage may also be higher than on your primary mortgage.

What is the IRS rule for second homes? ›

For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.

What age do most people buy a second home? ›

Assuming the median age of the typical “move up,” or second-time home buyer is roughly 40 years old (given the simple math of 33 + 8), a median repeat buyer age around 55 means that a lot more people in their 50s, 60s and 70s are acquiring third, fourth, or even fifth properties.

What are the disadvantages of owning a second home? ›

The downside of buying a vacation home is that you will have two of everything – mortgages, property tax bills, water bills, fuel bills, etc. It also means additional responsibility for repairs and general upkeep. At the same time, owning a second home can be very rewarding in tangible and intangible ways.

Is it better to have a second home or investment property? ›

Buying a second home can be significantly easier and less costly to finance than buying an investment property. Investment properties can offer you tax deductions by claiming operating expenses and ownership.

How much deposit do I need for a second home? ›

If you're buying a second home, you'll generally need at least a 15-20% deposit. But the higher the deposit you put down, the more likely you are to access better deals. For a buy-to-let mortgage, you're likely to need at least 25% of the property value.

Can I buy another house if I already have a mortgage? ›

If you still owe a large amount on your current mortgage or have other substantial debts, a second mortgage may put your debt-to-income ratio above the maximum the lender allows. You may be required to make a larger down payment for a second home, and a second mortgage will probably have a higher interest rate.

What is the debt-to-income ratio for a second home? ›

Debt-To-Income Ratio Requirements

Most lenders require a DTI of 43% or less to approve you for a second mortgage.

What is the rule for how much house you can afford? ›

According to the 29/41 rule, you should spend no more than 29% of your gross income on housing and no more than 41% of your gross income on the sum of all debt payments, housing included.

What is the home afford rule? ›

Calculating How Much House You Can Afford With The 28/36 Rule. The 28/36 rule states that a borrower's monthly mortgage payment should not be more than 28% of their gross monthly (i.e., pre-tax) income, and no more than 36% of their total debt. This rule is more commonly known as a debt-to-income (DTI) ratio.

What would my yearly salary have to be to afford a $2 M house? ›

Family Budget With A Two Million Dollar House

$3,000 more a month is $36,000 a year after tax, or about $50,000 more in gross income a year. If you had a down payment, you would need to make at least $400,000 a year income to afford a $2 million house.

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