Kevin Onizuk is a partner in Breakwater Mortgage and has been in lending business since mid-nineties. In this interview, he details how to pre-qualify for a second mortgage.

Q.What is first factor a consumer should consider before deciding to purchase a second home?

A.The first question to ask yourself is can you actually afford it? The lender will want buyer to have a high enough income each month to pay for both primary and secondary housing payments. The lender will also expect buyer to have cash in reserve. Normally three to six months times mortgage is expected to be in savings as insurance against any emergencies or economic hardships.

Q.What is difference between purchasing a primary residence and a second home?

A.When buying a second home for personal or investment purposes financial picture is slightly altered. The lender will require a larger down payment because they believe a loan on a second home is a higher risk. Lenders feel it is easier for buyers to walk away from a vacation home or rental property than it is from primary residence. Since lenders believe second homes do not foster same amount of owner commitment loans are considered more of a gamble.

Q.Does owning a second home offer any tax advantages?

A.Tax deductibility can be tricky. Always consult your tax advisor. Mortgage interest and real estate taxes are usually deductible, but you must live in your second property for part of year. If you choose to rent all rental income must be reported. Remember, any money spent to maintain properties are deductible. In summary, property taxes, mortgage interest, insurance, repairs, utilities, cleaning and upkeep are all expenses. Keep careful records of all money spent on these types of endeavors.

Q.Are there any benefits to getting a home equity loan?

My mobile home doubled in value in twelve years I lived in it. The home deteriorated a little (don't all houses?), but value of land continued to rise. Also, by renting rooms, I took in far more money from my home than it originally cost, and I was living in it!

Forget your prejudices and look at numbers. In this town, for example, a two bedroom house rents for $800/month, and costs about $120,000. A mobile home gets $500/month, but you can buy one on real estate for $50,000 or less. The cash-on-cash return on investment is obviously higher with mobile homes.

What about long term return from appreciation? House rentals here typically have negative cash flow, while mobile home rentals at least break even. Investors prefer houses anyhow, believing they'll build equity faster, but is that true?

Faster Equity With Mobile Homes

Buy a house for $120,00. Put $20,000 down, and you'll have a $100,000 mortgage loan. Amortised over 30 years at 6% interest, you'll have a payment of $599.60. Of first payment, $500 will go towards interest, $99.60 towards principal. In other words, you only built equity of $99.60. I'm ignoring appreciation, but only for moment.

Second scenario: Find a nice mobile home for sale, and borrow only $30,000, at 8% interest, amortised over 10 years. Note higher interest - this is always case with "factory built home mortgages." The shorter term is normal too, so you'll be done with payments in 10 years instead of 30.

Now, despite higher interest and a shorter term, payment will be only $363.99. The first month, $200 will go towards interest. That means other $163.99 goes towards principal. You bought more house (built more equity) in this scenario.