A First Look at a
Second Home
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n the current economy, home prices have dropped and mortgage interest rates have been lingering in record-low territory since midway through the second quarter. These conditions have presented opportunities for many who have been hesitant to purchase a vacation home or investment property in the past, when costs were much higher. For those who are able to pay the additional mortgage, taxes, insurance, repairs and maintenance on an additional property over the long term, there are many benefits to be gained, financial and otherwise.
residence for two of the last five consecutive years. This exclusion applies to one sale every two years. Also, while home prices have dropped, rental costs have remained relatively stable in many areas. While those who purchased property in 2005 or 2006 may have trouble using rental income to cover the ongoing expenses of owning a second home, recent buyers may find the extra money from renting their vacation home when they’re not using it can pay for a larger proportion of their costs. However, this takes planning, patience and effort to make it work.
In addition to the profits obtained from selling the home in the future, vacation homes are a lure for family and friends. Hosting family gatherings at your beachfront property or a ski trip with friends at your mountain retreat will create memories for you and your loved ones that will never depreciate in value.
In fact, before making a purchase decision on a vacation home or investment property, there are many considerations you should be aware of. It’s imperative you fully understand the homeownership costs that come with owning a second home.
A large number of buyers also purchase a vacation home with the intent to use it as their personal residence in the future. The appeal of retiring to a beloved vacation spot is obvious. However, it can also save on taxes when the house is sold. To qualify for the exclusion of up to $500,000 of gain on the sale of a principal residence, the home must be used as a primary
How Much Home Can You Afford? If you don’t have enough to pay off your second home with cash, you’ll need a mortgage. Your Loan Officer can help you determine the type of financing for which you qualify. You can usually prequalify by visiting your Loan Officer’s website, giving you a good idea of what you can afford.
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It’s not necessarily the best idea to go with the most expensive property you can manage, and it’s important to factor in additional costs, such as maintenance, utilities, taxes, furniture and other expenses. Your homeowner’s insurance may cost more than you’re used to, depending on the area in which the property is located. You should also make sure you have cash reserves set aside for extra expenses, many of them unexpected, especially if you plan on renting out your home. When you’re a landlord, you don’t have the luxury of making repairs “whenever you get around to it.” Be prepared to cover your mortgage payments for periods in which your property is not rented. Many vacation spots have off seasons, and renting out a vacation home is a lot of work. Even if you’re able to cover the home loan costs with your rent income, you should be prepared to pay the full mortgage if the property is vacant. Before You Buy Be aware that requirements for mortgages on a second home are higher than those for your first mortgage. Depending on the loan programs for which you qualify, banks may require anywhere between 10 and 50 percent of the total home cost for a down payment.