If your plans for the future include the purchase of a second home, we’ve got the information you need to make the numbers work.
The purchase of a home has long been seen as a cornerstone of the American Dream, offering financial benefits and a way to build wealth. In fact, for most families in the United States, their primary residence is the largest asset they own. There’s also higher demand for second homes as mortgage rates have stayed at record lows, particularly in less densely populated areas that naturally allow for social distancing.
Whether you’re daydreaming about a beachfront residence, dreamy lakeside cottage, or bucolic country retreat from urban commotion, it’s important to understand some key differences between securing financing for your primary and secondary residences. Whether you are considering buying a home for personal use, a family getaway, or as an investment property, you need to think through your options and ensure your second home purchase makes sense for you. Let’s take a closer look at some of the considerations associated with purchasing a second home:
Why purchase a second home?
People purchase second homes for a variety of personal reasons and financial strategies, including:
Vacation
In this unprecedented era of social distancing, more and more homeowners are rethinking the way they vacation with their families. Rather than spending hard-earned time (and money) at a large and heavily trafficked hotel or cruise ship, a vacation home may offer a safer and more enjoyable option for many families. With comforts of home and a more controllable environment, a vacation home offers a variety of advantages for long weekends, summer breaks and extended holidays.
Family Members
Some second home buyers may be in the market for a property designed to house family members other than themselves, such as a starter home for your adult children or a retirement condo for aging parents. For those who value intergenerational living, the opportunity to have children or grandparents closeby may offer a huge incentive to purchase a second home in the neighborhood.
Retirement
Some buyers want to secure a retirement property at today’s prices rather than waiting to see where their preferred market will be a few years down the road, especially if they have a clear idea of what their retirement timeline and income will be. While they wait to move in full-time, they sometimes help pay down their mortgage by renting out the space seasonally or year-round.
Investment
For those looking for the opportunity to create additional income and long-term profit potential, an investment property may be the way to go. There are opportunities from short-term options rented through a platform like Airbnb to long-term, buy-and-hold strategies. For even more investment potential, buyers can look to purchase a duplex, triplex, or quad in order to increase rental units and monthly income.
Considerations associated with a second home purchase
While a second home purchase may seem like a no-brainer, there are costs associated beyond those due for closing and the monthly mortgage payment. You’ll need to look at all of your potential expenses and determine whether your second home purchase makes financial sense.
Property Management
If your second home is far away, or if you plan to use it as an investment property, you’ll likely want to engage professional property management to ensure that the property is well-maintained and that repairs are made in a timely manner. For investment properties, your property manager can market and onboard new tenants and help provide ongoing services to increase tenant retention.
Community Requirements
If you are buying a home in a community with a homeowner’s association (HOA) or in a co-op or condo building, there may be restrictions on the way that you can use the property. Some HOAs and boards restrict the use of properties for rental, both short-term and long-term.Additionally, some communities may require a financial review and interview before you can purchase a home, and they may expect you to use the home as a primary residence.
Tax Considerations
Rental property income and second home ownership can open you up to a variety of tax consequences or may provide tax savings. In addition, if your second home is in another state, there may be differences in the tax code to evaluate. Talk to your CPA or financial advisor to determine how best to optimize the value of your second home purchase and upkeep.
How to secure financing for your second home.
Credit score requirements are generally higher for a second home purchase and, depending on how your primary mortgage affects your debt-to-income ratio, your down payment may be more as well. However, you may be able to take advantage of favorable interest rates on the second home. Talk to a licensed loan expert about the difference in requirements and cash reserves to determine how much second home you can afford. You may also consider refinancing your current mortgage in order to take advantage of today’s historically low interest rate environment—while pulling out some of the equity for use in purchasing your second home.
Simplist’s technology searches through more than 50,000 options, so you’re sure to find the financing scenario that’s right for your second home purchase. Talk to one of our licensed loan experts to get started, or, if you’re ready to move forward, begin your application process today.