Five Golden Keys… to Purchasing a Second Home

It’s hard to believe that the Holidays are already upon us. I know that buying a home right now is one of the furthest things on many of our minds right now. We’re thinking instead about Christmas gifts, decorating the house to get it ready for company, and not breaking the bank. I’m here to tell you that although mortgage rates are rising, they are still historically low, making this a great time to think about buying a second home. To make sure that your end-of-the-year-home-shopping a smooth process, instead of added Holiday stress, I’ve put together some key steps for you to follow:  

1. Find an Agent (Who Knows the Area)

The best way to start the search for a second home is to hire a proper professional, and one who is familiar with your desired location. The necessary steps in the real estate process change over the years, so you might as well have someone on your side who’s well-versed in the nuances and can help ensure you get the best possible deal.

You always have the option to purchase a home without an agent’s help or put your house on the market as for sale by owner, however, if you’re not familiar with the buying or selling process, you may skip over necessary steps. An agent could provide you information about neighborhoods, market prices, and the pros and cons of particular properties. With their eye for the long-term value of a property, the agent could fill you in on price histories and how comparable sales have fared, as well as resale prospects.

As you may have found in purchasing your first home, agent services vary depending on the area you live in, price point, experience and availability of the agent and your ability to communicate your needs. While some agents will only help you get from point A to point B when finding and purchasing a house, others will attend inspections, tidy up the house in question, or even facilitate your entire move.

#2 – Determine Whether You Can Afford Two Mortgages

First off, you have to qualify for a second-home mortgage, which will be an addition to any mortgage debt on your primary home. When you’re buying a home, mortgage lenders don’t look just at your income, assets, and the down payment you have. They look at all of your liabilities and obligations as well, including auto loans, credit card debt, child support, potential property taxes and insurance, and your overall credit rating.

You will need to make a down payment of at least ten to twenty percent, meet credit standards and debt-to-income requirements, and provide documents for income and asset verification. If you have a good relationship with the mortgage lender on your first home, that may be a good place to start in your quest for a second-home mortgage.

You can use a loan qualification calculator to check mortgage rates in your area.  Also, if you are thinking of tapping into your home equity you have built up on your primary residence to help pay for the second home, keep in mind that if you need that equity for an emergency, you may not be able to access it.

#3 – Factor in All Costs

With trends like it is today, many second-home buyers are more interested in enjoying their property rather than simply obtaining a quick return on their investment. It’s important that you consider that you may still be away from the property a lot of the time, which usually entails additional costs, such as having a management company check the place in your absence for water leaks, frozen pipes or other problems.

Getting insurance for a second home may be more challenging than it is for a primary residence. This is because there are taxes that come with owning a second mortgage, and costs that will only apply to your second home. 

You should factor in costs that you may not have had to worry about with your first home. For example, if you are considering a second home on the beach, you’ll need flood insurance, in addition to regular home insurance. It has become more difficult to get flood insurance in coastal communities, and the cost has increased exponentially in some markets.

#4 – Consider Taxes and Tax Implications

You may want to forget about deducting mortgage interest on a second home. If the home you were planning to buy is a vacation home, tax reform means you’ll pay more for your getaway.

While you could previously deduct mortgage interest on a second home as well as on a primary home — as long as your combined mortgages were under the $1 million cap — this is no longer permitted under the new rules. 

The Tax Cuts And Jobs Act caps to the mortgage interest deduction at $750,000. So if you already have a $750,000 mortgage and get a loan for a vacation home, you won’t be able to deduct the interest on the second mortgage. If you rent out your second home, you will have to consider additional tax ramifications, particularly if the rental period extends beyond 14 days a year.

The ban on deducting interest on a mortgage for a vacation home affects only new purchases, so if you already have a vacation home, you may want to hang onto it.

#5 – Consider Your Goals

Whether you’re considering buying a second home to rent out, to move to and rent your old home, or what have you, there are some great benefits.

For one, you can sell your investment home and use the proceeds to buy another rental property without paying a capital gains tax. A rental property is a long-term investment, you could pay the mortgage with the rent income each month and pay off the mortgage without spending any of your own money. You will still be able to write-off the interest paid on your second home which is a huge plus.

When you’re ready to purchase a home, it may be beneficial to write out the goals you have for you and your family. Determine whether the second home will be a vacation home for you and your family, an emergency or guest home, or an additional income and for what purposes.

Know that writing down your goals isn’t the challenge. After all, with a word processing system, your laptop or even just pencil and paper, you can write down all the goals you like. The trick is coming up with effective goals you can realistically accomplish. Write down your needs (an adequate credit score, a substantial down payment and gross income that leaves enough for the house payment, etc.) and how you plan on going about fulfilling those needs.

I hope that all of this was helpful. If you have any questions or concerns, leave a reply below, as I’m always here to help.