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Buying a second home will double your housing costs, so consider your financial picture carefully first.
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If you plan to rent a home to cover some of the expenses, be sure to research local laws and tax implications.
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If you are planning to vacation there, make sure you really like the place and won’t get bored or yearn for a change after a few years.
If you are considering buying a second home, you will first want to carefully weigh the full impact it will have on your finances. Since you have two homes, the entire financial burden of being a homeowner will fall on your shoulders – twice. You will have to pay twice for things like mortgage payments, homeowners insurance premiums, property taxes, utilities, maintenance and more. Here’s what to expect.
Even if you can afford double the cost of housing, keep your big-picture goals in mind, says Daniel R. Hill, CEO and founder of investment advisory firm Hill Wealth Strategies in Virginia. Hill encourages her clients to consider these issues before jumping into another home:
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Are you saving at least 15% of your current salary for retirement?
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Do you have six months’ (preferably nine months’) expenses in a period emergency fund is it easily available?
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Are you out of credit card debt?
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If applicable, have you set up a college fund for your children?
If you can tick all these boxes, you may be in a safe position to be considered buying a vacation homesaid the Hill.
Getting a second home loan is not much different from getting a first home loan. You will submit an application and review your credit, income, employment, assets and liabilities. However, you will likely be required to make a much smaller down payment than when you purchased your primary residence, and you may have to meet stricter financial qualifications. Mortgage rates are also slightly higher for second homes than for primary residences.
Read more: Compare today’s loan 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 going to be a rental property, make sure you make that clear in advance.
Financing options to consider include:
Are you sure you want to visit the same place for a long time? After a few summers on one beach, the appeal may wear off. Likewise, a scenic five-hour drive can eventually become a burdensome schlep. If your family absolutely loves the place, it would make sense. However, consider whether you may choose to plan multiple trips to different destinations.
Rental income can help finance the cost of your vacation rental. However, make sure you understand the local laws before buying. Zoning laws vary by state, city and location, so what works in one community may not be allowed in another. For example, while Airbnb short-term rentals are popular in many places, they are illegal (or very restricted) in others.
For condos, find out if city ordinances allow tenants. The same goes for co-op housing or areas governed by homeowners associations.
Keep in mind, too, that the specific times you want to use your property – spring break, long holiday weekends – are probably the peak times when tenants are most likely to want you.
“Sadly, the greatest need for employers can happen when you want to be there,” said Timothy Parker, managing partner and CEO at Regency Wealth Management in Ramsey, New Jersey. “When we look at the numbers with customers, we usually suggest that they rent a house for a week or a month instead of entering the rental world.
A vacation home can be classified as a personal residence or rental property by the IRS, depending on how many days you spend there and how many days you rent to others. In most cases, you will be required to report rental income without classification.
If your vacation home is considered a rental property, you generally won’t be able to claim a mortgage tax deduction like you would for a primary residence. Instead, the interest is usually deducted as a rental expense. You may also be able to deduct maintenance and other costs related to renting. Talk to a tax advisor about whether your rental plans make financial sense.
Despite all the work and expense, there are many good reasons to buy a second homeincluding:
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To become your primary residence one day: A second home can eventually become your primary residence, so you can avoid moving when you’re ready to retire. This is especially helpful if your second home is in an area with lower taxes than your primary residence.
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To receive 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 rental platform. This can provide a stream of income and allow you to build wealth over time.
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Going on holiday to: If you have a favorite vacation spot that you really want to return to again and again, buying a home there can make sense. This will allow you to avoid the hassle of finding and paying for a rental or hotel every year.
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To diversify your investment: Is buying a second home a good investment? Well, owning a second home can help you move beyond the typical stocks, bonds and 401(k) plan. A second home can also serve as a buy-and-hold investment – real estate tends to appreciate in value over time – and be a valuable asset to pass on to heirs.
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To help a family member: Maybe you want to give your older child a leg up in the housing market, or a place to stay while they attend college. Or maybe you are caring for an elderly relative that you would like to have closer to your home. Buying a home for them can be a viable solution in these situations.
For many Americans, owning their own homes is a smart move. But a very small subset should consider buying a second home. Anyone who remembers the housing crisis of 2007 knows that home values are not guaranteed, and a second home should not be the main basket for retirement or other long-term nest eggs – they are very illiquid, and their growth is very unpredictable.
In fact, a second home can be a valuable financial asset that has the potential to increase your wealth over time, especially if its value appreciates significantly. But all this assumes that you can afford the cost. Budget carefully, and make sure you feel comfortable with your financial priorities before taking on a second set of housing expenses.
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What are the best mortgage rates for a second home?
Mortgage rates for second homes tend to be higher than those for primary residences, because lenders consider them to be more risky. For example, if you are facing financial difficulties, you are more likely to pay off the mortgage on the house you actually live in than on the one you recently moved to or rented.
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Is it hard to get a second home loan?
It all depends on your situation. If you can comfortably pay the mortgage on your primary residence, you shouldn’t have too much trouble qualifying for a loan on a second home, as long as it’s not too expensive. And for investors, there is a special loan that underwrites your loan application based on the potential income generated by the property.
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Do you need to put 20% down to get a second home?
That’s not the case. Some lenders allow you to put down 15% or less. However, compared to low payments for primary residences, you are less likely to find loan programs that offer low payments for second homes.
Additional reporting by Maya Dollarhide
