(Stalin’s Dacha via Crimean Backpackers)
Home is a place you grow up wanting to leave, and grow old wanting to get back to. ~John Ed Pearce
I grew up in Riga, Latvia, where every summer our family would rent a house on the seashore on the Gulf of Riga, in an area called Yurmula. Each village had its’ own train station that was accessible by an electrical train.
There are wonderful things to experience in the area, including the cold water beach, forest, and river. Children would spend most of their days playing while parents would arrive after work, after a 45-minute train ride from Riga. In the evenings, we would go for walks along the water. It was a marvelous experience. A summer home in Russia is called a Dacha. When my wife and I bought our second home in The Sea Ranch many many years later, we called our home Dacha as well. We sold it a number of years ago, but we still love to visit the area and rent a house in The Sea Ranch. According to my wife, it’s one of the best places in the world.
Second homes are popular and there are specific areas like Lake Tahoe, where people buy beautiful homes with the hope to visit them often, which usually does not happen. Therefore, these homes end up in the rental pool to help offset mortgage payments. When it comes to financing, borrowers receive the same interest rate for their second home as the first one (i.e. lowest rate) during the purchase. To qualify for those low rates, lenders combine all the expenses, (i.e. mortgage payments, taxes, and insurance–called PITI–for both “owner occupied” properties), and divide it by the borrowers income to arrive to the first qualifying ratio. This is usually where we have the first problem. Borrowers often do not show enough income to stay within a 45% qualifying ratio. The typical solution is to declare a second home as a rental property, which it will normally become anyway, and to show the potential rent to offset the PITI. This in turn creates additional challenges. First, the rate for rental properties is slightly higher and the down payment has to be larger.
In addition, there is the rule of four properties. There are only a few lenders who can lend to borrowers who own between four to ten properties, but with restrictions. For example, borrowers who have more than four properties can finance a second home, but not a rental property.
Then there is an issue of the appraisal value. Many second homes that are not as desirable as the first ones lose their original value.
A client came to us recently to refinance his second home. In his case, it was not rented; so we could help him, even though he owned a total of six properties. The problem we faced was that he had a first mortgage and an $80,000 credit line. But unfortunately, we could notuse the solution I described last week (i.e. combining the first and the L/C). The estimated value of the home only allowed us to refinance the first mortgage, which had the 6.75% rate. It seemed that we were at a dead-end. Then I asked him what the interest rate and the loan type was on his primary residence. As it turned out, we not only could add $80,000 to his first mortgage on the house, but also lower his existing rate, with a total savings of about $2,000/month.
Recently I had an opportunity to introduce my book to 30 members of the BNI (Business Networking International) Chapter in San Francisco, which I started 16 years ago. Here is my presentation:
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