6 Things You Need to Know Before Buying a Second Home
As a seasoned homeowner, you’ve been paying off your mortgage and are now considering buying a second home – a place you can retreat to on vacation, an investment property, or maybe even a combination of the two. You’ve been through the home-buying process before so you know what to expect, but there are certain factors unique to buying a second home that you’ll want to consider. These factors will vary depending on how you intend to use the property, so it’s a good idea to determine if the home will be for mostly personal use or if it will be occupied by tenants.
Here are six essential things you should consider before buying a second home:
1. Can I Afford It?
It may seem like an obvious question, but can you afford a second home? If you choose to take out a mortgage on a new property, take some time to carefully understand the requirements so you’ll be better prepared for the process when submitting your mortgage application.
As a homeowner, you’re probably well aware of the strict credit requirements for taking out a mortgage, and things get even more serious when it comes to buying a second home. Your debt-to-income ratio will, of course, be a significant factor, and when it comes to holding two mortgages, you may find it a bit more challenging to balance this ratio. Also, be prepared to shell out a hefty amount for a down payment, since you’ll be required to put at least 10 percent down on a vacation home and perhaps an even higher amount if it will be used as an investment property. And don’t forget that a second home will need to be protected, so you’ll want to talk to your homeowners insurance agent about getting a quote, once you’ve got your sights set on a second property to call your own.
2. How Will It Affect My Taxes?
Understanding the tax implications of your new property will be another challenge. If you intend to rent your place to tenants, that means you’ll earn rental income throughout the year, and that income will be taxable. As the owner of the home, you also may be able to take deductions in the form of mortgage interest, property taxes, repairs, depreciation, and operating expenses.1 One of the most important things to do as the landlord is to maintain accurate records of your income and expenses throughout the year in order to properly report the information on your tax return.
3. What Home Expenses Should I Expect?
Just like your primary residence, your second home will also require you to shell out cash for expenses – both expected and unplanned. It’s helpful to have a budget set up for home needs, and with two homes, this may be an even more critical step, since your expenses will be elevated. In addition to the maintenance costs, remember you’ll have property taxes, insurance, potential homeowners’ association dues and more. If the property is at the beach or in a flood zone, you’ll also need to consider things like flood insurance in addition to your regular homeowners policy. And finally, if you plan to rent the property, you’ll also need to look into[…]
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