Your dream vacation property is within reach. Wouldn’t it be great to have a part-time residence that you could come and go from as you please?
If you find yourself continually drawn to a particular destination, you may want to consider getting a second home there. It's often cheaper in the long run than finding a hotel and will allow you to enjoy longer stays more often. However, you’ll need to consider factors such as budget, maintenance, and insurance as well as location when thinking about getting a second home.
It’s extremely important to budget for having two mortgage payments unless you own your primary home free and clear.
If one month, you find that you can only afford to make one mortgage payment, you’re likely to make the payment on your primary home first. Because second home loans result in increased risk for mortgage lenders, you’ll have to make a slightly higher down payment. This is part of their assurance that you can afford it.
One of the reasons for mortgage bond investors to invest in second home mortgages is that the homeowners may pay a slightly higher mortgage interest rate. This means a higher payment on a second home than you would have on a primary property.
Now that we’ve gone over the budgeting of getting a second home, let’s make sure we go over what qualifies as a second home.
In order to classify the property as your second home, you have to spend some significant portion of the year there. That said, if your loan is backed by Fannie Mae or Freddie Mac, you can also rent the property out for up to 180 days without it being considered an investment property.
Keep in mind that if you rent the property out for 15 days or more, you’ll have to report the income to the IRS. However, along with that, you may be able to deduct certain rental expenses. You do have to occupy the home for at least 14 days or 10% of the days it would otherwise be rented out – whichever is greater – in order to maintain your eligibility for the mortgage interest deduction. Lenders will probably also consider it an investment property if you don’t follow these IRS minimum guidelines for residency.
If you have a jumbo or other non-conforming second home loan, you’re still most likely limited to 14 days of rental.
If you’re going to buy a second home, it’s very important to consider the location. You want it to be far enough away that you can get away from the world, but not so far away that you never get there. If you plan on hosting family a lot, maybe look for something that’s centrally located within a few hours of everyone.
Make sure that the property you buy is within easy driving distance of everything that attracted you to this place to begin with.
There are restrictions on how much a property can be occupied by someone other than you, so it’s important that you see yourself spending a lot of time there. You’ll want to be there often enough to be able to handle the upkeep as well.
Since your second home will be unoccupied at least part of the time, consider how you might handle these maintenance issues.
You probably don’t want to pay too much for utilities if you’re not going to be around the house for a significant period of time, so one strategy would be to shut everything off.
Just be careful if you do this in a place with a cold winter climate. If you don’t keep the heat at a certain level, your water pipes could freeze and burst, causing all sorts of problems. If you prefer not to pay the gas bill when the property is unoccupied, you can always drain the water pipes before you leave.
You may choose to leave electricity on if you have a connected security system, as the security system can save you some money on insurance. But cable is safe to turn off when you’re away. You can do the same with the internet, as long as your security system doesn’t rely on it.
The cost of homeowners insurance on a second home will be higher. The Insurance Information Institute lists a couple of reasons for this, including that the property won’t be occupied consistently. This puts you at increased risk for theft or the frozen pipe scenario described above.
Your second home’s location can also play into your rates. If you have a remote location in the mountains or a beach house, Mother Nature can throw more at you and put you at increased risk for home damage.
If owning a second home sounds appealing to you, you can get started here or by calling us at (801) 272-0600.