With interest rates at historic lows, many Alabamians are finding that this is a good time to buy a second home on the lake; to take out a construction loan to build or pay for home renovations; or to refinance existing mortgages.
In fact, with rates so low, I have seen clients who purchased homes recently coming in and wanting to refinance.
In terms of buying a second home, if you are starting to look at properties in the area, here are a few things you can do to make sure you aren’t making any financial mistakes in the process.
First, you’ll want to get pre-approved. Houses that are priced right are getting snatchedup quickly in this market, so you want to be able to act quickly without waiting to get approved.
Your mortgage specialist analyzes your qualifying factors, but you should also take a broader look at how a purchase could impact your finances. First, consider the down payment that will be required – usually 10 percent for a second home, but maybe as much as 25 percent, depending on the loan type and amount.
Then, make sure that you’re comfortable with the payment — not just the principal and interest. You also need to consider the costs of homeowner’s insurance, property tax and homeowners’ association fees. Depending on the size of the house, you should also consider the cost of upkeep, utilities and other necessities. Taking a big-picture look at this will help you feel comfortable that you won’t be putting yourself in a tough financial situation down the line.
When you make an offer on that beautiful property you’ve fallen in love with, you will supply your pre-approval letter to the seller. Make sure you don’t show all your cards here — you want to be sure that the pre-approval letter from your bank does not, for example, say you are approved for a $400,000 purchase if the price you want to pay for the home is only $350,000. (In this case, ask your mortgage provider to update your pre-approval letter to match the price of your offer.)
As another helpful way to use bank financing for your home, if you are buying or own a home that needs a lot of work, or if you want to build a new home, you should look into a construction loan. And if you own a homesite free and clear, you can use the equity to secure the construction loan. A construction loan is specifically tailored to match this type of project, since it includes giving payments to the contractor as work is completed.
Finally, if you already have a mortgage, it might also be a good time to consider refinancing, since you may be able to reduce either your payment or the term of the loan.
For example, we have clients who bought a home just a few years ago with a 30-year mortgage, and they’re now refinancing to a 15- or 20-year mortgage while keeping their payments close to what they were before.
As you consider all these mortgage options, it pays to look into whether your mortgage provider has any incentives for refinancing at this time, such as reduced or zero closing costs or a low fee for refinancing.
The key is having a knowledgeable mortgage professional who can help you see the options and choices ahead of you – someone who will take the time to understand your personal situation and has the knowledge to craft a solution that works for you.
~ David Ballard is a home loan consultant for Valley Bank, drawing on a complementary background that includes experience in the insurance and construction fields. He focuses on helping customers finance homes.