Editor's Note: This story originally appeared on Point2.
A second home can be an excellent investment as long as you do your research and plan ahead.
But it can also result in financial hardship if you’re not prepared.
With that in mind, here are five things to consider before buying a second home.
1. What Will You Use It For?
Second homes are usually used as vacation homes, secondary residences for work, or investment properties. If you’re applying for a loan to buy a second home, your lender will need to know what you plan on doing with it.
For example, investment properties are typically more challenging to finance since lenders see them as riskier.
As such, a mortgage on a vacation home or a secondary residence tends to have a lower interest rate than one on an investment property.
2. How Will You Finance It?
Most people will need to take out a loan to purchase a second home.
Depending on what you plan to use your second home for, you have a few different options. For a vacation home or secondary residence, you may qualify for a conventional mortgage, secondary mortgage, or even a jumbo loan.
Alternatively, you could consider refinancing your current mortgage.
For example, if you have a good amount of equity, you may qualify for a Home Equity Line of Credit (HELOC) or a cash-out refinance.
In the case of the latter, you basically swap your existing mortgage for a new, larger one, thus gaining access to the equity you’ve built up in your primary residence. If you have enough home equity, this may enable you to buy your secondary property outright.
3. Do You Have the Funds?
Whichever financing option you choose, it’s essential to create an accurate budget and ensure that you can afford both the closing and ongoing costs related to owning a second home. Consider the following:
- Down payment: Lenders generally require a down payment of at least 25% for a second home.
- Debt-to-income (DTI) ratio requirements: You’ll typically need a DTI of 43% or lower to qualify for a second mortgage.
- Maintenance costs: You may need to renovate or repair parts of your second home before it can be used.
- Utilities: These aren’t usually high for vacation homes, but if you’re renting your second home out, you’ll need to keep on top of the utilities.
- Insurance: Most lenders will insist you take out comprehensive insurance whether you’re renting or using the second home as a holiday residence.
- Taxes: On top of regular property taxes, you may need to pay a conveyance tax.
- Extras: Think about furnishings and decor, as well as things like HOA fees, if necessary.
4. You Don’t Have to Go It Alone
Many people choose to split the cost of a second home between friends and family. This can be a great way to save money and gain an asset that benefits everyone.
But, despite how close you are, it must be treated as a business arrangement. Otherwise, things can soon become more complicated than convenient.
5. Make a Plan for When It’s Not in Use
Whatever you plan to do with your second home, it’s worth having a plan for when it’s not being used. For example, if you plan to rent it out, you need to prepare for the fact that you might not find a tenant immediately.
Likewise, if you’re using it as a holiday home, what will happen to the house while you’re not there? Can you rent it out to other holidaymakers? Will you need to hire a management company to take care of things like maintenance?
Think about your options and formulate a solid plan.
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