Buying A Second Home
– So you are thinking of buying a second home to use as an investment property or as a vacation home. Either way, you may want to do it sooner than later. With interest rates still at historic lows and property values affordable (yet stable), it’s a good time to weigh your options and consider taking the next step.
What’s the Difference Between An Investment And Vacation Property?
An investment property is utilized to rent out or, alternatively, to hold for investment or for financial reasons. Whereas, a vacation property is purchased for recreational use of the buyer. Lately, vacation home sales have been on the rise while investment property purchases have been on the decline according to a National Association of Realtors report. In 2014, the median sales price of an investment home was $125,000 and the median vacation home price was $150,000. Both prices were down from 2013.
What to Consider
The long-term value of the property is something to consider. Look into sales comparables and examine historical trends in your area to see if the property is worth considering. Regardless of whether it is a vacation home or an investment property, you are more than likely looking for the long term rather than to gain a quick return on investment. The goal is to have a property appreciate over time and, if you utilize the property as a vacation destination, you can get value out of over time as you and your family enjoy it. Whereas, an investment property should return a monthly profit. Either way you go, it’s important to factor in taxes, insurance, utilities and various maintenance costs associated.
Qualifying for a Mortgage
Obtaining a mortgage for a second property purchase is not much different than what you had to go through for a primary residence. The primary difference is that you have to qualify for a second-home mortgage with your current mortgage debt on your primary residence factored in. The debt-to-income ratio still applies in the case of purchasing a second property (this includes vehicle and student loans, credit card debt and mortgages). The normal down payment of 20 percent still applies in most cases with some lenders requiring more or less of a down payment amount. Many homeowners go to their current mortgage lender to inquire about a mortgage on a second property.
Mortgage underwriters will typically look for a fair amount of reserves. For instance, in some cases they may want to see six months worth of mortgage payments for both properties. Lenders may consider the income that a second home will provide if you plan to rent it out. Interest rates on a second home will also vary depending upon a variety of factors. In some cases, they are higher than that of a mortgage on a first home while other lenders may offer comparable interest rates to that of a first home purchase.
Factoring in Taxes, Insurance & Maintenance
Taxes on a second property vary depending upon the use. If you are using the property as a second home, then mortgage interest payments and property taxes may be deductible. Other tax ramifications may arise if you rent out the home. If the rental period goes over 14 days in a calendar year, then that may alter tax amounts. Investment properties have an entire different set of tax ramifications. Consult your tax professional to analyze your options.
Insurance can vary with some estimates for a vacation home costing 20 percent higher to insure than that of a primary residence. Why? Because you won’t be residing at the home full-time then insurance is viewed as riskier. If a pipe springs a leak, then it will take longer before it is found.
Maintenance can add up, especially on a second home. Now you have two roofs, two driveways, two sets of every appliance to factor in when you have two properties. The general rule of thumb is to factor in approximately 1 to 1.25 percent of the homes purchase price towards annual maintenance.
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