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QUESTIONS TO ANSWER BEFORE YOU BUY SECOND HOME
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It’s best to work with a real estate agent and mortgage professional, who are familiar with the local market and can help you navigate any rules or guidelines that may be unique to the area. You’ll want to clarify any local transaction fees, taxes, and restrictions related to local zoning or property rental rules. If you plan to rent your property, it’s especially important to research all these rules before you buy. Homeowner and condo associations, as well as cities and counties, may ban or set rules specific for rentals. In some cases, the local regulations may require you to collect lodging taxes and pay them to the appropriate authorities just as hotels do. Your lender will take all of this into account and help you calculate the total monthly cost of your existing home, as well as the cost of the second/vacation home to analyze the cash you will have available for the down payment, closing costs and reserves.
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It’s important to discuss with your lender whether the home will be a vacation getaway solely for your use or if it will be an investment property that you will rent out. The answer to this question matters in terms of financing and your lender can help you compare the different scenarios.
If you are purchasing an investment property, you can rent it and also have the option to use it when it’s not occupied. Mortgage rates may be higher for investment properties than for second homes and the down payment required typically starts at 30 percent. But, check with your lender to see if lower down payment options may be available. To qualify you for the loan, your lender will use your full primary residence cost plus your full investment home cost, in addition future rental income can be used to help you qualify. Rental income is taxable on federal and state returns so tax treatment is less beneficial when compared to the purchase of a second home. But, the extra rental income may help offset the reduced tax benefit.
If you are purchasing a second home for your own enjoyment, you can use it anytime you want, but you will not have the option to rent the home. You can purchase the home for as little as 15 percent down, and qualify for the loan using your full primary residence cost plus your full second home cost. Mortgage rates and tax benefits will be the same as if you were purchasing a primary residence.
If you are purchasing a home that will be your primary residence in retirement, you may be able to purchase for as little as 3 percent down, depending upon your loan amount, and you will likely benefit from significant homeowner tax benefits.
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The total cost of ownership will include the purchase of furniture, housewares and ongoing payments for things like property taxes, insurance, utilities, trash removal, landscaping and any other maintenance costs. When you have an idea of the costs and location for your second home, you can start a conversation with your current homeowner’s insurance carrier. If you already have a relationship established with the carrier and can use them for both of your properties and car(s), you may qualify for a better rate. But, a regular homeowner’s policy rarely covers a vacation rental so ask your agent what type of policy you need for a home that is used for short-term rentals. Additionally, you will need to factor in the costs of cleaning, advertising, and property management if you plan to rent out the home.