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Is it better to pay off mortgage on first house before getting preapproved for a mortgage on a second home?

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Hi all:  So here's the deal, My wife and I are beginning to look for a second (vacation) home but we have just over a year left on the mortgage on our first home.  Should we pay off the first mortgage before applying for a preapproval on the second, or should we keep that money to use toward the down payment on the second?  Things have changed quite a bit since we purchased the house 15 years ago and I'm trying to find out as much as possible before taking the first steps.  Thanks you all for your input!

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rated:
Preapproval isn't an especially important stage, you won't be locked in for any rate or closing costs. It's your real application where the details will matter. And I think it will depend on your specific numbers. An existing mortgage payment will count as a monthly debt and lenders will have Debt To Income ratio limits. If you need to lower your monthly debt payments, eliminating the mortgage can certainly help with that. I think it's much better to instead pay off any credit card balances before they post to your credit report - but maybe that won't be sufficient. Once you meet the DTI limits, there's no point in reducing debt payments further, you'll get the same mortgage options.

Likewise, having cash for a down payment is going to be a big factor both in approval and possibly in the rate options you get. This will mostly be about the Loan To Value ratio, and the bigger your down payment, the lower that is. You should shop different scenarios around with different lenders to see what the options are currently whether you put down 3%, 10%, 20%, or more.

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A mortgage broker can also be a great help in figuring out the 'best' way to do this in your specific scenario.

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you have a year left on mortgage 1? Assuming your home 1 value hasn't dropped 95%, you have plenty of equity.
If you want a vacation home, you can tap into your equity to pay down payment for 2nd. No need to wait until you pay off mortgage1 to apply for mortgage2.

At the end of the day, you'll be approved for a maximum loan value of XXX. It doesn't really matter if XXX is across one or two mortgages, and you should talk to a mortgage broker to find out what number XXX is.

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Spooie said:   Hi all:  So here's the deal, My wife and I are beginning to look for a second (vacation) home but we have just over a year left on the mortgage on our first home.  Should we pay off the first mortgage before applying for a preapproval on the second, or should we keep that money to use toward the down payment on the second?  Things have changed quite a bit since we purchased the house 15 years ago and I'm trying to find out as much as possible before taking the first steps.  Thanks you all for your input!
I wouldn't worry about it for the pre-approval process, but would consider it when you are actually shopping for your 2nd mortgage. As others have stated, a mortgage broker (and/or tax advisor) might be helpful here in determining your best path forward.
Some things to consider

  • Is the vacation home going to be more expensive than your primary residence? (if significantly less, is a HELOC a viability alternative?)
  •  How much time do you intend to spend there? (Might come into play on if interest is deductible)

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Spooie said:   Hi all:  So here's the deal, My wife and I are beginning to look for a second (vacation) home but we have just over a year left on the mortgage on our first home.  Should we pay off the first mortgage before applying for a preapproval on the second, or should we keep that money to use toward the down payment on the second?  Things have changed quite a bit since we purchased the house 15 years ago and I'm trying to find out as much as possible before taking the first steps.  Thanks you all for your input!
  
Are you paying off with some cash that is not in the bank?  Because they can easily see that you have the money during preapproval if you have bank statements.

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b534202 said:   
Spooie said:   Hi all:  So here's the deal, My wife and I are beginning to look for a second (vacation) home but we have just over a year left on the mortgage on our first home.  Should we pay off the first mortgage before applying for a preapproval on the second, or should we keep that money to use toward the down payment on the second?  Things have changed quite a bit since we purchased the house 15 years ago and I'm trying to find out as much as possible before taking the first steps.  Thanks you all for your input!
  
Are you paying off with some cash that is not in the bank?  Because they can easily see that you have the money during preapproval if you have bank statements.

  No all the cash is in the bank right now.  Just trying to gauge what would be the best strategy going into this, which basically comes down to either a larger down payment or lower debt to income ratio. 
 

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I dont' think this can really be answered without knowing all the numbers.

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If your income is high enough and your down payment is large enough, then it won't matter.  For example, you generally won't get better terms for a 30% down payment than you would for a 20% down payment.  Likewise, if your debt to income ratio is 30%, you won't get better terms by paying off debt to get it any lower.  The other question you have to ask is whether you would get better terms on your primary residence than you would on the second home.  Think about a cash out refinance or a HEL or HELOC on the primary residence as an alternative to financing the second home, and compare the cost of each option.  The best option will also be dependent on your planned repayment period.  If you need a 30 year loan for payment affordability, you couldn't very well go with a 5 year home equity loan. 

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As others said, best to run this by a mortgage broker who can pull your credit and give you exact advice on how it all works. I think if you have less than a year to go on payments, they may not factor in the monthly payment in doing their DTI calculations. It basically just boils down to DTI. If your ratio is good, you don't have to pay down the 1st. If it's borderline, then it might make sense to pay off some other debts to lower your DTI number. Typically those are credit card payments and others debts that have a shorter amortization period as those affect DTI more than a mortgage. Just the the pre-approval now and see what the lender says you can afford now in the current situation. If you want to buy more, then see what you can do about getting better DTI numbers.

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Good info to have - thank you all!

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