Getting your hands on a second home is tough.
This is not to demoralize you, but it is the truth.
It involves planning, huge investment and maybe a massive maintenance expense.
But you have made up your mind for a nice and cute second home. So, we will try to discuss a few facts that you must understand before you make your dream come true.
What is the need for a second home?
Some say vacations, some need to relax, some deem profits.
What’s your reason then?
It is very important to get this matter straight first. Why do you need a second home? If you don't find any valid reason and just go ahead for a random one, just because your spouse, or your kids are nagging all day long, or you feel like you are not fitting in one home anymore, then I would say step back, and make a decision that you find suitable.
Your second home must have a purpose.
If you are planning for a vacation home, then there are a couple of things you must understand:
- Your vacation home will be costly; to be practical, you can use the same money for making multiple trips. So figure out what will be best for you. With a second home, you can only plan static holidays to the place where you purchase this second property.
- Your second home will be abandoned for the maximum time of the year. So you need to take suitable measures for proper maintenance.
Are you counting profit?
I would always support you if you are picturing an investment property. It’s got it’s perks. Buying a second house and renting it out is a nice strategy if you have enough savings and financial security to experiment with.
You will start to incur a fresh new income out of your investment.
In addition, you have people to look after your property and duly inform you about any repairment or other hazards as thefts. So, your property won't be left abandoned while you are away.
But there is a catch.
A lot of tax questions will arise. Also you cannot evade the lenders from the fact that you are going to use this purchase as an investment property. This is where the mortgage rates will start to increase.
So, where to start?
The shopping is difficult.
Finding mortgages with low interest rates for your second home is almost impossible. Why is it so?
The lenders will consider your decision as a high risk factor with a probability that you might drop out of the plan any time you find making payments is getting harder than you planned.
Buying a primary residence is always easier than getting hold of a second home.
The lenders will start to evaluate a new debt-to-income ratio for you. They may allow a 45% DTI ratio , but there’s no way you can elope making a down payment of 20% - 25% of the total purchase value.
I say it’s better to understand the market first.
Now the mortgage rates will be anywhere around 4.5% for a 30-year plan.
While doing your vacation home shopping, at first keep the idea of renting away. Now speak to brokers and real estate agents to get a thorough concept of the market value. You must consider household expenses in the city where you are planning to do your investment.
If all these calculations seem pretty affordable, then you are ready to take out the mortgage.
Have you considered the bridge loan?
A bridge loan is a short term loan that is used by general people and companies in order to start a new investment.
They take out these loans to meet current financial requirements.
I am talking of a bridge loan because this might be useful for you if you are unable to make heavy down payments for your second home mortgage.
You can consider this as an option and do a bit of research yourself. The bridge loans have higher interest rates but acts as a good funding.
How about the insurance?
This could be a big pain.
A second home means it is your second priority and you can anytime give up on this purchase.
A second home will not be looked after so well unlike your first home.
So, the insurer will think they have good risks of claim from your side when it comes to second home maintenance.
Therefore? They will charge more for insurance.
Purchasing suitable insurance coverage for a second home is expensive compared to insurance plans for your primary residence.
How can you rent out your second home?
Buying a property and putting it out on rent is cool. But the problem is with the taxes.
A tax levy is seriously the last thing you want.
You must file in those monthly rental payments you receive in your tax papers.
No! We are not here to teach you how to avoid taxes.
We can say, if you rent out your house for more than 300 days in a tax year, you need to show it in your tax files.
That’s what the IRS says.
In addition, your dwelling property is considered a residence if you live in it for more than 14 days in a tax year.
So, these are the basic information I could have provided you with regarding your second home purchase. For further queries, I advise you to consult a tax accountant and real estate agents to find out whatever buying option is suitable for you.