HELOC, HEL, or 2nd Mortgage to finance Second Home

[Sam H.]

Hello!  

I am looking into purchasing a second (vacation) home and would love to hear your thought on the pros and cons of going a conventional 30-year second mortgage vs. using a HELOC or Home Equity Loan on my Primary Residence to purchase the second home outright. Here are the details:

Purchase Price: $300K

Down payment if taking mortgage: 10%

Available cash on hand: $40K

Equity in Primary Residence: $700K - $1M

Second Home will need $10K initial investment to freshen up for personal and STR use.

Assume equal rates for each product?  Or does one product typically offer better rates?

I am thinking the Pros of the HELOC/HEL are a faster closing, perhaps a cash discount for the purchase, no PMI, lower rate/cheaper closing?, and keeping my $40K cash to invest in the property. Pros of the second mortgage are reducing the risk on my primary residence. Seems like a no brainer to me...What am I missing?

Thanks!

Sam

[Michael King]

Hey I have been looking at similar loan products though I plan to really dive in when my work slows down in beg of March. 

Obviously rates may differ than the rate sheet being advertised but just looking it appears the home equity and home equity loans are going to be more than a second mortgage or even a cash out refinance. Just as a comparison for using greater Cincinnati credit union they have at top tier credit score 6-7% on 7-12 year fixed rate loans, 9.5 on variable loans and 5.25-6% on 10-30 year loans.

From what Ive seen looking the home equity and heloc are similar if you get a fixed rate heloc if not your probably paying more in interest. My understanding is Heloc since its a line of credit can be drawn anytime so say you buy the property with and the ac goes on a heloc you could use that to pay for it where the home equity has a period/ gives all the cash upfront.

With how much equity you have in your primary if it was me I would think about doing a cash out refinance for the whole thing as rates would be lower. The time to close might be harder I would look at heloc. If your really needed it one could also consider hard money though that will come with higher rates and getting someone to give you 300k first time might be harder than just getting loan then you could refinance it later.

Since your a high net worth person I would also try talking to local/regional and even big bank lenders. They might be willing to give different terms especially to a high net worth person that they can likely make money on cross selling.

I dont see how the risk would be reduced on second mortgage unless you are planning to hold the property in some type of llc. Im no legal expert but belief if you get foreclosed on 2nd home and you still owe money they can come put lien/go after first house.

One thing to think about is when doing heloc on primary if you want to refinance you need to get their signoff as well as your primary loan which could cause complications.