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Buying a second home can effectively double your housing costs, so think carefully about your overall financial situation first.
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If you plan to rent out your home to offset some of the costs, be sure to research local regulations and tax implications.
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If you’re planning on vacationing there, make sure you really like the place and won’t get bored or crave change after a few years.
If you’re considering buying a second home, you’ll first want to carefully weigh the full impact it will have on your finances. With two homes, all the financial responsibilities of home ownership fall twice on your shoulders. You have to pay twice as much for things like mortgage, homeowners insurance, property taxes, utilities, maintenance, etc. This is something to look forward to.
Even if you can afford to double the cost of housing, keep your goals high, says Daniel R. Hill, CEO and founder of Hill Wealth Strategies, an investment advisory firm in Virginia. Hill encourages his clients to consider these questions before moving into another home:
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Are you saving at least 15% of your current income for retirement?
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Do you have six months (ideally nine months) of expenses? emergency cash fund Is it easy to obtain?
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Are you paying off your credit card debt?
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If applicable, have you established a college fund for your child?
If you can check all of these boxes, you’re probably safe to consider Buy a vacation homeHill said.
Getting a second home mortgage isn’t much different than getting a primary mortgage. You will submit an application and have your credit, income, employment, assets and debts reviewed. However, you may need to make a larger down payment than you would for a primary residence, and you may have to meet more stringent financial qualifications. Mortgage rates for second homes are also slightly higher than for primary homes.
Learn more: Compare today’s mortgage rates
You generally cannot use a government-backed loan, such as an FHA or VA loan, to finance a vacation home. Lenders also treat investment properties differently, so if your property is primarily for rental, be sure to make this clear up front.
Financing options to consider include:
Are you sure you want to stay in the same place for a long time? After spending a few summers at the same beach, the appeal may wear off. Likewise, the picturesque five-hour drive can eventually become a burden. This makes sense if your family really likes the location. However, consider whether you would rather plan multiple trips to multiple destinations.
Rental income can help subsidize the cost of your vacation property. However, make sure you understand local laws before purchasing. Zoning regulations vary by state, city, and even community, so what works in one community may not be allowed in another. For example, while short-term Airbnb rentals are popular in many areas, they are illegal (or severely restricted) in others.
For apartments, find out if the bylaws allow tenants. The same goes for homes in co-ops or communities that are managed by a homeowners association.
Also keep in mind that the exact times you want to use your property—spring break, long holiday weekends—may also be the peak times when renters want them most.
“Unfortunately, the greatest need for renters is probably during the time you want to be there,” said Timothy Parker, managing partner and CEO of Regency Wealth Management in Ramsey, N.J. “When we look at our clients’ data, we often end up recommending that they rent a home for a week or a month rather than go into the landlord’s world. It’s often cheaper and less hassle.”
A vacation home can be classified by the IRS as a personal residence or a rental property, depending on the number of days you spend there and the number of days you rent it out to others. In most cases, you must report rental income regardless of classification.
If your vacation home is classified as a rental property, you generally won’t be able to claim a mortgage interest tax deduction like you can with your main residence. Instead, interest is usually deducted as rental expense. You can also deduct maintenance and other lease-related expenses. Discuss with a tax advisor whether your leasing plan makes financial sense.
Despite all the work and expense, there are many great reasons to Buy a second homeinclude:
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To one day become your primary residence: A second home can eventually become your primary residence, allowing you to avoid moving when you’re ready to retire. This is especially helpful if your second residence is located somewhere with lower taxes than your primary residence.
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Earn rental income: As long as your property is in an area that allows short-term rentals, you can make money by listing it on Airbnb, VRBO, or any other home rental platform. This can provide a passive income stream and allow you to build wealth over time.
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Go on vacation: If you have a favorite vacation spot that you really want to return to again and again, it might make sense to buy a home there. This will save you the hassle of finding and paying for rent or hotel accommodation year after year.
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To diversify your investments: Is buying a second home a good investment? Well, owning a second home can help you go beyond the usual stocks, bonds, and 401(k) plans. A second home can also serve as a buy-and-hold investment—real estate does appreciate over time—and is a valuable asset that can be passed down to heirs.
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Help family members: Maybe you want your adult children to have a foothold in the real estate market or a place to live while they go to college. Or, you may be caring for an elderly relative who you wish could live closer to your home. In these cases, buying a home for them may be a practical solution.
For most Americans, owning their own primary residence is a smart move. But a small number of people should consider buying a second home. Anyone who remembers the housing crisis of 2007 knows that home values ​​are not guaranteed and that a second home should not be the primary basket of savings for retirement or other long-term goals—it is too illiquid and its growth is too unpredictable.
Of course, a second home can also be a valuable financial asset that has the potential to increase your wealth over time, especially if its value does appreciate significantly. But all of this assumes you can afford the costs. Budget carefully and make sure you’re very comfortable with your current financial priorities before taking on the costs of a second home.
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What are the best mortgage rates for second homes?
Mortgage rates on second homes tend to be higher than mortgage rates on first homes because lenders view second homes as riskier. For example, if you’re facing financial hardship, you’re more likely to pay the mortgage on a home you actually live in rather than a home you just vacationed on or rented out.
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Is it difficult to get a second home loan?
It all depends on your situation. If you can easily afford a loan for your primary residence, you shouldn’t have much trouble qualifying for a loan on a second home, as long as it doesn’t overburden you. For investors, there are special loans that will underwrite your loan application based on the potential income generated by the property.
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Do I need a down payment of 20% to buy a second house?
not necessarily. Some lenders allow you to put 15% down or even less. However, you’re less likely to find loan programs that offer a low down payment on a second home compared to a down payment on a primary residence.
Additional reporting by Maya Dollarhide
