Many people dream of having a second home. Wouldn’t it be great to have a place to escape to on the weekends or for vacations – your own private oasis?
But there are certain things you need to be aware of before you take the plunge and take out a mortgage on a second home. Since a lender is taking on more risk when providing financing for a second home, they may be a little less flexible in providing a second home loan than they were with your first one. In addition, there are a number of potential speedbumps that you should avoid along with opportunities that you might not have considered.
Here are 5 things you should take into account when buying a second home:
Buy Property that’s Geographically Desirable
First, you should know that a lender will need to determine if your second home is a “reasonable distance” from your primary residence. What’s a reasonable distance, you might ask? Essentially they’re confirming that you are in fact buying a second home and not an investment property.
It’s also important that the home you choose as your second home be one that you’ll definitely use, in an area that you enjoy visiting but not so far away so that you’ll never use it. A vacation home isn’t much of a bargain if it’s in the boondocks, no matter how great a deal it is.
You also need to consider how easy it is to get to the property and the availability of amenities, including quality health care and services. Hiking into the wilderness or having to fly in by bush plane may make a great adventure, but doesn’t make for easy access.
And take into consideration the type of lifestyle you’re looking for. A condo at a resort can offer access to many activities but it may not be your cup of tea. While a cabin in the woods or on a lake may offer solitude but, could also require too much of your time spent on maintenance.
Consider Buying a Fixer-Upper
Everyone has their own vision of a dream vacation home. Buying an existing one may be someone else’s dream home but a far cry from your own. But there is a solution. Consider buying a less-than-perfect property and fixing it up to make it your version of Better Homes and Gardens. If you use a home improvement/renovation loan which can be rolled into the mortgage, you can update the home to your satisfaction and have the pride in knowing it’s upgraded to suit your specific tastes and needs.
The one thing to remember – as with any home purchase – is to have it professionally inspected so you’ll know exactly what you’re getting into in terms of cost and how much time it will take to have it fixed. You should also check out local zoning and homeowner’s association rules as they may limit what you can and cannot do to alter the appearance of a home.
Have Your Second Home and Rent It Too
Some people combine their use of a second home as a vacation getaway with an occasional lease or rental. This way you can make money while you’re not there and save money by not spending on lodging during vacation time. But be aware that the IRS considers a vacation or second home an investment property if you use it for less than 14 days a year or 10% of the time it is occupied, whichever is less. What that means to you is you can deduct many of the overhead costs, including mortgage interest and maintenance. If you only rent it out part of the year, you can still deduct some costs but on a pro-rated basis.
Make a List of Possible Expenses
Calculate all the expenses you’re likely to incur in owning a home. Can you fit them into your budget without breaking the bank or leaving you without much leeway? While it’s great to build equity in a second home, if you’re really tight on cash every month, it’s probably not worth it. You’re likely better holding off on the second home until you’ve paid off the first one.
Some of the expenses you need to factor in are:
- Property taxes – these vary state to state
- Utilities – sure they’ll be lower because you’re not there all the time, but it’s still an expense
- Upkeep – your house like your car will eventually need repairs and regular maintenance such as landscaping and painting. You need to periodically check the roof and if you live in a cold climate area – the pipes which can freeze
Know Your Financing Options
Most people are unaware that there is a difference between financing a second home and getting a loan for an investment property. Lenders tend to charge a higher interest rate and require a larger down payment for an investment property than they do for a second home.
Here’s a closer look at what you can expect in terms of a down payment for a second home vs. an investment property:
- The down payment on a second home can be as low as 10% with a conventional loan
- An investment property can require a down payment that varies between 15 and 25% depending on the number of units
- Lenders view second homes as vacation homes and expect borrowers to live there at least some time during the year. If the property is rented out continually or offered as a timeshare, it is considered and investment property.
- With less than perfect credit
- Previous home ownership events
- Looking for lakefront or luxury second homes
- Seeking a loan with less restrictions
- Living in the U.S. or foreign nationals
By factoring in the 5 tips we’ve listed, you’re much more aware of what to look out for and what kinds of questions to ask when you’re seeking a loan for your second home. It will make the process run smoother, help you avoid any less than pleasant surprises and let you concentrate on finding the perfect second home to enjoy. Learn more about second home loan options by contacting a McMullen Group loan officer today.
By Jack Honig - Prime Lending