Stabilization in the real estate market and still-low interest rates might have you thinking about investing in a second home for vacations, rental income or re-sale. But a positive market environment isn’t the only factor you should consider.
Know the Real Cost
It’s important to understand that buying a second home is not a way to save vacation money compared to hotel stays. Nor is it an investment you can make and simply let sit. As with your primary residence, you’ll pay property taxes, insurance, utilities and maintenance costs, plus the mortgage. And some of those costs may be bigger for a second home.
For instance, second homes may cost as much as 20 percent more to insure than a primary residence.1 You may need additional coverage, too, such as liability (especially if you’ll be renting it out), and flood or hazard insurance.
In addition, since you won’t be on-site every day, you may not notice small upkeep issues until they become bigger, more costly problems. And you may pay others to do work you would normally do yourself. All of which means your maintenance budget could grow.
Also, if you opt to hire a property manager, that could cost you 20 to 30 percent of the home’s rental income.1
View the Big Picture
Naturally, then, it makes sense to ensure that you’re well positioned to handle these costs, as well as your other financial obligations and goals, such as fully funding your retirement accounts.
Assess your current debt-to-income ratio, too. Ideally, debt, including mortgage payments on the new property, should comprise no more than 36 percent of your monthly gross income.1
Then look at your money on-hand. Can you comfortably put 10 to 20 percent down on the new place? Do you have 3 percent of the purchase price to cover closing costs?1
Understand Tax Implications
A second home can affect your tax picture, too. Check out local property taxes before you buy. Then talk with your tax advisor to discuss potential income tax impacts if you’ll be renting out the property. Also ask about possible tax deductions related to mortgage interest and property taxes. Different rules may apply compared to your primary residence and depending on whether you rent the property out.
Know the Location
In real estate, it’s all about location, even with second homes. If you’re buying for yourself, then location matters only in terms of your personal preferences. But if you’re planning to rent now and/or ultimately sell the property, then you need to consider how the location appeals to others.
If resale is your goal, review local home values, schools, medical facilities, the economy and the community. If renting is your aim, review area rental rates and rental activity, as well as area attractions, amenities and other potential “pulls” for vacation renters.
In general, the mortgage process and product offerings are the same for second homes as for primary homes, and lenders look at the same factors. The biggest difference is that your financial picture must be strong enough to cover your current mortgage as well as the new one. On the bright side, if you’re looking for ways to fatten your down payment, you may have the option to leverage equity in your primary residence.
Let our experienced and knowledgeable mortgage bankers guide you through the process of financing your primary residence or a second home. Locate a mortgage lender near you and get started on your dream home today!
1 “Eight Questions You Should Ask Yourself Before Buying a Second Home,” by Kate Ashford, LearnVest.com, posted July 3, 2014, http://www.learnvest.com/2014/07/buying-a-second-home/, accessed Nov. 30, 2015
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