What To Consider When Purchasing a Second Home

 A second home to many is a vacation home or an investment home.  In order for it to be a smart investment, you should do your research and plan ahead.  So it will not become a financial heartache, here are several things to consider before you purchase a second home.

1. What Will You Use It For?

As mentioned before, a second home can be used for a vacation home or investment and can even be used as a secondary residence for work. You will need to decide what you are using your second home because a lender will need to know.  Investment properties are more risky for a lender while a vacation home or secondary residence are not as risky.  The secondary residency and vacation homes will usually have a lower interest rate than an investment property.

2. How WIll You Finance It?

Unless you have a chunk of cash on hand you will more than likely need to get a loan to purchase your second home.  Remember depending on what you are using your second home for will determine which loan option is right for you.  If you are purchasing a second home as a vacation home, then you will more than likely qualify for a conventional mortgage, secondary mortgage, or a jumbo loan.  If you have a current mortgage and a lot of equity in your primary home, you might be able to obtain a Home Equity Line of Credit (HELOC) or cash-out refinance.

3. Do You Have the Funds?

You want to create a budget to make sure you can afford closing costs as well as ongoing costs that come with owning a second home.  When creating the budget, keep in mind the down payment for a second home is typically a minimum of 25% of the purchase price.  Your debt-to-income (DTI) ratio is 43% or lower in order to qualify for a mortgage for a second home.  As far as homeowner insurance goes, you will need to take out comprehensive insurance on a second home no matter if it is a vacation home or you are renting it as an investment.

4. You Don’t Have To Go It Alone

To make it a bit more affordable and easier for financing, many purchase a second home with friends and family and split the costs.  In order for it to work, you need to treat the arrangement as a business.  Everyone can benefit, gain an asset and save money by splitting the costs.

5. Make a Plan for When It’s Not in Use

A second home might have times when it is not being used, so it is good to have a plan for this time.  If this is a rental income property, you need to come up with a plan if you do not find a tenant right off the bat.  If it is a vacation home, think about renting the home out to other vacationers when you are not using it. If this is the case, there are tons of management companies that can take care of the process.

If you are in the market for a second home, now might be a perfect time for you to purchase one.  Choose a realtor from the area that can help with the process from start to finish.  A local sales agent can be especially beneficial when it comes to vacation homes, as they know the area best.

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Purchasing An Investment Property or Second Home

 A great way to invest in real estate is in either a second home or an investment property. This type of real estate is a sound and profitable way to build wealth and generate a passive income. Fixed mortgage rates keep mortgage payments the same each month, so investors can predict their cost and profit. There is a risk with investment properties, so consider these four tips to find out if you are ready to purchase an investment or a second home.

Be sure to do your research and get advice

Like any decision, you will want to do your research before making the decision to purchase. There are many factors you will need to consider such as the condition of the property, location, and the area's demand for rentals. Before you take a step, do your due diligence when it comes to your finances. You will want to make sure your income can support two mortgages even if you plan on renting your second investment. Also keep in mind that there will be additional expenses such as home repairs, maintenance, and furnishings.

Budget for the expected and the unexpected

Second properties have some expenses that are different than your primary home. If you purchase a second property either to sell for a profit or rent, many areas have permitting fees and additional taxes for investment properties. Remember to work with a tax preparer who will help you with capital gains or an increase in income.

Knowing when the time is right

Right now home prices are rising, so you may be able to use the equity on your primary home to pay for your second home. This can be done through a cash-out refinance or a home equity loan. A cash-out refinance is the most popular choice. There are no limitations on what you can use the money for. A home equity line of credit is secured by your primary home's collateral. Right now is a great time to take advantage of these types of financing with such low rates.

Understand how you plan to use the second home

Either way, you need to speak with a mortgage lender whether you a using the second property for rental income or a second residence. Lenders follow the guidelines of Fannie Mae and Freddie Mac to ensure that you are able to afford both mortgages. There are different terms you must meet to be approved for a mortgage on a second home.

If the property will be a renovation or resell you will more than likely have to pay a higher downpayment and interest rates. Lenders take more of a risk when they lend money to someone who is purchasing a second home or investment property. Do not plan on trying to obtain a VA or FHA because these two types of loans cannot be used on second properties.

Not only do you want to secure a lender, but also secure a Realtor to help you with your purchase. A realtor can navigate the purchase from searching for your second home to closing the deal.

 

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