So, you’re think you’d like to invest in a second home. You’re feeling financially secure and ready to have a vacation property of your own someplace you love to visit. Take a look at 7 things you should consider before making the purchase.
1.Can You Afford A Second Mortgage?
One mortgage is stressful enough, make sure you can handle two. Unlike the down payment for a first mortgage (about 20%), when looking into a second home, you’ll be looking at a number closer to 32% toward your downpayment. A second mortgage is definitely doable, as long as your debt-to-income ratio means your lenders standards.
2. The Standards Are Higher
Speaking of standards, be prepared to break down your assets in greater detail than you did the first time around. Mortgage companies want to be sure that you can financially handle a second home loan with your current financial situation. Wether or not you plan on renting out your second home may also have an impact on the type of mortgage you qualify for (i.e. second home vs. investment property). Lenders are also going to expect a higher credit score than before – think 725 and above.
3. Have You Looked Into Interval Ownership?
With Interval Ownership, your name goes on the deed right alongside other joint owners. Its as much yours as it is theirs. Your investment value increases as the property market increases. You’re putting your money into something that can be passed down through generations. Generally, each share owner is entitled to 10 weeks at the home, 2 of those weeks during prime summer season. This means you get to enjoy your home at different times throughout the year. Owners can also rent out their weeks! If you’re looking for more of an investment than a summer home, or maybe a little bit of both, you can rent out some or all of your 10 weeks.
4. Hire A Real Estate Agent
This is your best chance at finding the vacation home of your dreams. Agents make the home buying process go much smoother. They know all the ins and outs of the market and can help you with all the legalities. Agents have the experience and know how to spot the perfect home that will fit your budget and they tend to have solid knowledge about the area they work in. Having an agent on your side ensures a professional eye is scooping out potential problems with the home and clauses you might not have noticed in the fine print. The best part – it costs you nothing to enlist an agent. Agents collect on the commission paid by the seller of the house.
5. Know The Taxes
Keep in mind, when tax season comes around, you can deduct real estate taxes and mortgage interest on your second home. But also remember, if you rent your home out for more than 14 days out of the calendar year, you must report and pay taxes on any income you earned off that rental time.
6. Consider Renting For Extra Income
Buying a second home, but only going to use it a certain amount of time every year. Why not rent it out the rest of the year? Renting out your second home can be a great source of passive income – or a way to cover some or all of the costs that come with owning a second home.
7. Can You Afford The Extra Expenses?
Remember, its not just the cost of home or the second mortgage that are going to affect your monthly expenses. Other hidden costs such as homeowners insurance, property tax, etc. need to be taken into consideration as well. Depending on the location where you choose to buy your vacation home, these costs might be even greater than they are for your primary residence.