A second home can be an exciting prospect, whether you’re thinking of renting it out or making it a place to take vacations or maybe even eventually retire.
But don’t rush it.
Just because you’ve been through the process of buying a home before doesn’t mean you know all the pitfalls — especially since some new expenses might apply to any property beyond your primary residence.
Here are several things to consider before you become a homeowner twice over:
1. You will have more ‘hidden’ homeowner costs
Every expense you got hit with on a first home likely will be back for a second one.
That certainly includes property taxes and homeowners insurance, but also some costs you’ve possibly forgotten about because you’ve become used to paying them or paid them over time. They can include furnishings, homeowner association fees or yard maintenance.
Depending on how much time you plan to spend in the second residence, some “hidden” costs, such as utility bills, may be higher or lower than you’re used to. But either way, an additional home means additional recurring expenses.
To prepare yourself further, check out “10 Overlooked Homeowner Expenses — and How to Save on Them.”
2. It might be harder to qualify for a second mortgage
Unless you have the cash to buy a second home outright, you probably have some extra planning to do. You may need to save more and raise your credit score.
Mortgages for second homes generally require a larger down payment and a higher credit score than mortgages for primary residences, according to Northwestern Mutual. The down payment for a second-home mortgage is usually at least 10% of the loan amount.
It might be possible to borrow against the equity of your first home for a second, but that can be a complicated decision. You should consider all your options first.
3. Mortgage interest deductions work differently now
Another thing to keep in mind: The 2017 federal tax reform law temporarily changed the mortgage interest equation.
For tax year 2018 through tax year 2025, you can deduct interest on a total of up to $750,000 — rather than $1 million — in qualifying debt for a first and second home, according to the IRS. For married couples who file separate tax returns, the threshold is $375,000, down from $500,000.
These lower thresholds apply to loans taken out after Dec. 15, 2017.
That federal tax legislation also made it less worthwhile to itemize your tax return. Unfortunately, the mortgage-interest deduction is only available if you itemize.
Your tax picture gets more complicated if you plan to rent out your second home.
4. Timeshares are a time (and money) trap
One way to potentially lower the costs of a second home is to split them with others by buying into a timeshare property — but this comes with a lot of risks.
Firstly, you might not be lowering costs as much as you think. As we explain in “What You Need to Know About Buying or Selling a Timeshare Property,” you face annual fees that can range from hundreds to thousands of dollars in addition to upfront costs.
Second, timeshares can be hard to sell without losing money if you ever change your mind.
5. It might not be everything you thought
The financial considerations of a second home are one thing. But if you’re considering buying for a vacation spot or for retirement, make sure you’re committed to avoiding future remorse. You don’t want to purchase in a place you aren’t sure you’ll love year after year.
You might get bored with vacationing in an area, or find the home isn’t well-suited to your future needs in retirement. Is it a size you can maintain? Does it have the safety features you’ll need? Will you have a social network in the area?
It might be better to rent before you’re sure about buying.
For more considerations, check out “12 Ways to Avoid Homebuyer’s Remorse in Today’s Market.”
What are you thinking about for a second home? Let us know on our Facebook page.