If you’ve reached a point in your life where you’re ready to buy a second home, it’s in your best interest (personal and financial) to get a lay of the real estate land before you make an offer. Wyndham Capital Mortgage is here to offer you five things to know about buying a second home and signing a second home mortgage.
Buying A Second Home? 5 Things You Should Know
1. Owning a Second Home Costs More Than You May Realize
Brush past the financial curtain of the monthly mortgage of your second home to see additional costs you might not have anticipated. There’s another insurance policy, the cost of upkeep and the possibility you’ll have to hire a management company to help make sure everything’s shipshape at your second home when you aren’t there. Buying a home by a lake or beach? You could be required to have a flood insurance policy. Have a talk with your finances and see what they have to say about these extra costs.
2. An Abundance of Research Is Required Before You Buy
Just as you had to research your first home, you have to do the same for your second home, possibly more due to your circumstances. If your second property is meant to be a vacation destination, be sure to talk with people in the neighborhood to see how they like the area. It’s also best that you get a solid idea of the taxes you’ll have to pay for your second home. If you aren’t in your residence for more than 14 days or more than 10 percent of the time you rent it out for the year, your second home is classified as a rental property. If you fall into this category, you’ll need to report your rental income on your taxes.
3. Consider the Financial Requirements of a Second Home
Expect higher financial requirements on your second home, if you aren't paying all cash. Generally, you’ll want to save up a down payment that’s at least 25 percent of the home’s asking price. Even if your lender doesn't require such a substantial down payment, the bigger it is, the less you have to borrow.
4. The Interest Rate on Your Second Home Will Likely Be Higher Than That of Your First
It’s likely that the interest rate on your second home mortgage will be higher than your first home’s rate. To help offset the increased cost, you might want to think about a home equity line of credit, also known as a HELOC. What this line of credit does is allow you to tap into your current home’s existing equity in order that you can boost your down payment and lower your interest rate. While a HELOC is a good idea, it’s entirely possible that you might become “upside down” should the value of your first home ever decrease, which can be especially frustrating if you’re still paying off the mortgage on your first residential property. Enter into your line of credit with both eyes wide open.
5. Know Why You’re Buying a Second Home
Are you buying a second residential property for a vacation home, an investment or as a rental property? Whatever the reason might be, make sure you figure it out well before you start looking at properties. Doing so helps immensely with narrowing down your options and finding the right property. Knowing the answer to this question also gives you a more solid idea of how much you’ll likely have to spend on upgrades, maintenance and the like.
Buying a second home can be a great investment, but it can also be a massive headache if you don’t do your due diligence. Be sure you’re prepared mentally and financially before making a commitment. Ready to take the next steps?