Should You Buy a Second Home? Affordability And Other Factors to Consider
09.15.2020 | Category: Homebuying
We know that for many, the idea of buying a second home or vacation home is a tempting idea. When done right, investing in real estate can be both a lucrative and satisfying endeavor. Whether it’s a cabin in the woods, a place near the beach or somewhere in between, a second home can be a good investment under the right circumstances.
Can You Afford to Buy a Second Home
As you explore your options to buy a second home, there are several factors that you’ll need to consider.
Affordability - For many, the primary consideration for buying a second home is affordability. Lenders and investors consider second home and investment property purchases to carry higher risk. What’s the reason? Many believe that if a borrower were to fall under financial hardship, they would be likely to prioritize their primary residence over their second or vacation home. Unfortunately, because of this inherent risk, you can expect to have a higher down payment requirement, higher interest rates on your mortgage, and stronger qualifying requirements. On top of budgeting for the potential increase in upfront costs, you’ll want to consider whether you can afford the added monthly mortgage costs of your second home.
Maintenance - As you’re probably already well aware, the costs of owning a home extends beyond your monthly mortgage payments. We recommend that you account for these expenses as you work through whether you can afford a second home. These expenses may include ongoing maintenance like housekeeping, landscaping, and pool maintenance. It may also include more upfront costs like furniture, appliances, home security, lawn services, etc. With any major purchase, it’s important that your budget can handle the expenses, and that you don’t leave your budget stretched too thin.
Investment Property vs. Second Home
If you’re considering buying a second home or investment property, it’s important to realize that there are different mortgage rules, regulations, and taxes that apply to each. Here’s a quick overview of each with notes pertaining to some of the key regulation differences:
Second Home - A second home or vacation home is considered a property that you are primarily purchasing for your own use, that you will live in for some portion of the year. Second home purchases generally have more favorable mortgage terms than investment properties, because lenders believe that they carry lower risks than investment properties. Most lenders require that a second/vacation home has to be at least 50 miles from your primary residence, and that the property cannot be rented.
Investment Property - An investment property is a home that you’re looking to generate income on. The owner generally doesn’t live in the home, instead it’s rented out. Or you might hold on to the property until it appreciates enough in value so you can turn a profit. While investment properties do not have a location restriction, they generally have more stringent lending requirements. When you are purchasing an investment property you should expect to have a greater down payment requirement, receive high interest rates, and stronger qualifying requirements.
Mutual of Omaha Mortgage is pleased to offer smart financing options for second homes and investment properties. To get a complete picture of the costs and impact on your personal finances, we’d highly recommend discussing your plans with your Tax Advisor and Financial Planner.
How to Choose Where to Buy Your second Home?
You’ve undoubtedly heard the mantra before: location, location, location. As you start to evaluate a new investment property or second home, where you’re going to buy is key to your success. One of the biggest things that you’ll need to consider when choosing a location is how you plan to use the property. Is this going to be a vacation home, investment property, or someplace that you’d like to flip. Your intended use will be a major factor as you consider different properties and locations.
In addition to how you’d like to use your home, here are a few tried and true tips to help to evaluate new communities and locations for your home purchase:
- How long properties tend to sit on the market before selling? This can tell you a lot about the health of the real estate market and how desirable the location is.
- Review what renovated vs. unrenovated properties are selling for - especially if you’re planning to make enhancements or flip your new home.
- Check out how safe your new community is - a neighborhood that has a low crime rate is an inviting and safe place where most people want to live.
- Research future development plans for new schools, hospitals, public transportation, and other civic infrastructure. These additions can affect the desirability of the surrounding area and can dramatically improve property values.
- Proximity and convenience to access things like:
- Grocery stores
- Restaurants and entertainment
- Schools - even if you don't have kids, if you want to sell your home in the future, many buyers will be on the lookout for good schools
- Review the biggest and richest employers within close proximity.
- See how your new city or neighborhood ranks on the best and worst places to live.
Pros & Cons of Buying a Second Home
● Designated vacation spot
● Potential retirement housing
● Asset diversification
● Tax breaks
● Potentially a good investment
● Added responsibilities
● Additional expenses
How Do I Buy a Second Home?
Buying a second home or investment property will follow the same overall process of your original home purchase. While the lending requirements will be different, you can expect the file flow to be similar. To get started, you’ll need to complete a mortgage application and review your financing options with your mortgage loan officer. Similar to when you purchased your home, you will be asked to provide documentation about your assets, liabilities and income to qualify. Once you’ve completed your application, your loan file will go through the underwriting process and go to closing, just as you did when you bought your primary residence.
As you explore your options to buy a second home there are lots of factors to carefully consider. If you’d like to talk to one of our Mortgage Experts about your buying options, please don’t hesitate to reach out to us at 1-800-24-RATES