Research local property tax rates, and try to get a sense of the housing market in the area. Is it trending upward, a sign that your second home could also increase in value? If you can make a sizable down payment and still leave plenty of cash reserves, go for it — a bigger commitment on the front end can pay off in the big picture and reduce your overall debt burden.
Keep in mind that getting second home insurance may be more challenging than for a primary residence. It has become more difficult to get flood insurance in coastal communities, and the cost has increased exponentially in some markets. Discuss these expenses with your agent and make sure your budget lines up.
Second homes and investment properties can be easily confused. In addition to securing a loan, understanding what distinguishes a second home from an investment property is important when you file your taxes. If you use it as a true second home — rather than renting it out — you could get a deduction for mortgage interest and property taxes, just as you do with your first-home mortgage. Different tax rules apply for second homes deemed investment properties rather than vacation homes, too.
Buying a second home means you always have a place to escape, but being a second homeowner comes with some harsh realities: more costs, more maintenance worries and more potential tax stresses. How We Make Money. David McMillin. Written by. David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less. Edited By Suzanne De Vita.
Edited by. Suzanne De Vita. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Reviewed By John Stearns. Reviewed by. John Stearns. Share this page. Bankrate Logo Why you can trust Bankrate. For this reason, we explore these specific elements further below. When asking yourself how much second home can I afford , you should consider the following:.
A second home is an additional property that you plan to live in for part of the year. Often second homes are purchased as vacation homes in sunny locations or other recreational destinations. An investment property, on the other hand, is purchased primarily for investment purposes, often for the purposes of generating rental income.
Because of this distinction, lenders and taxation authorities in the United States and Canada will have different treatment for each. In the United States, the IRS may treat your home as an investment property instead of a second home if you rent out your property for 15 days or more.
Similarly, by renting out a second home frequently, the CRA may view your property as a commercial enterprise as opposed to a secondary residence. As a consequence, you will be required to report any rental income to the relevant taxation authorities and otherwise deal with the additional responsibility that comes with operating an investment property.
From a lending perspective, mortgage terms for second homes will typically be more favorable than mortgage terms for an investment property. This is due to the increased risk profile of an investment property a borrower is less likely to default on a second home that they occupy for part of the year than a rental property. There are several upfront and recurring costs , such as closing costs and property taxes, that can eat up a significant portion of your budget.
The amount of the sales price you finance determines your monthly interest and principal payment. Depending on your location, the property taxes for part-time residents can be different than what full-time residents pay. Homeowners insurance is another cost to factor into your budget. The lender will create an escrow account for your insurance and property taxes and use the funds from it to pay those bills on your behalf.
Your tax preparer can help you navigate the reporting process. One downside of buying a second house is having to maintain two properties. You may need to make some upfront repairs and renovations before you or a tenant occupies the home. Short-term rentals will require cleaning between guests. Visiting your second home requires time and money. You must decide if the commute is worth the potential benefits. Your interest rate will be 0. On an investment home, the rate will be 2. The larger your down payment, the lower the rate premium.
Here are the lender requirements for second-home purchases as established by Fannie Mae and Freddie Mac:. The minimum credit score to buy a second home is 40 points higher than the minimum needed to qualify for a conventional loan on a primary residence.
If you have enough equity in your first home, you could use it to purchase, or at least make a down payment on, your second home.
Maybe you already refinanced your main home at rock-bottom rates and refinancing again would mean paying a lot in closing fees. One thing to remember: home equity loans and HELOCs usually have higher interest rates than first mortgages, but you can use the money however you want.
Cash-out refinancing can be a great way to take advantage of lower interest rates while pulling out some of your accumulated equity. Credible can help you easily find the latest rates for your next cash-out refinance. Compare multiple refinance rates from our partner lenders in just a few minutes — all without leaving our platform.
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