Many people dream of owning a second home. Whether it’s the convenience of having your own place near a secondary work location or a permanent vacation destination, a second home has its perks.
But purchasing a second home works a bit differently than a primary residence. Here’s what you need to know.
1. Mortgage Requirements are Different
One of the most important things to understand is that mortgages on second homes are different. Typically, you won’t find low down payment options like you can with primary residences. In most cases, the down payment requirement will be between 10 and 25 percent, so you’ll need to be ready to offer up more cash. Places like North Coast Financial Inc. can help you figure out exactly how much you will need.
Additionally, credit and debt-to-income ratio standards may be more significant. This is especially true if you still have a mortgage on your primary residence.
2. Second Home Insurance Challenges
Some insurers have reservations about second homes. Typically, these properties aren’t in your immediate area, so they may worry whether maintenance will be an issue.
Additionally, certain locations come with challenges that you may not experience at home. For example, beachfront property will require flood insurance along with traditional homeowner’s insurance. Plus, rates in some locales are automatically higher than others, representing a potential budget-buster.
3. Second Home Tax Benefits
Just as with a primary residence, there are tax benefits for buying a second home. In many cases, you can write off mortgage interest and property taxes on your tax return. While this savings isn’t substantial, it exists almost automatically.
Additionally, if you rent it out for less than 15 days in a calendar year, that income is tax-free. On the other side, if you only use the property for no more than 14 days a year, you may be able to write off a variety of home-related losses as well.
4. Rental Income Potential
If you decide to rent out your second home for more than 14 days a year, you can still experience financial benefits. Yes, you have to pay taxes on the income, but you’ll likely end up with a net gain. In some cases, you can use rental income to cover your mortgage (if you have one) and other expenses like insurance and repairs.
Essentially, with proper planning, you can possibly own a second home without increasing your out-of-pocket spending.
5. Buying and Selling a Second Home
Both buying or selling a second home can be a challenge. Primarily, this is because the property isn’t near your primary residence. This means you need to deal with real estate agents near your second home, which isn’t always as convenient.
Additionally, you are often operating with time restrictions. You may only have a few days to view properties, if you are buying, or handling complex paperwork. If you don’t have a lot of time to spend in your second home’s city, this can make the process cumbersome.
Ultimately, buying a second home requires a lot of planning, often exceeding what you went through when purchasing your primary residence. However, there are a lot of benefits, especially if you will use the property regularly, so don’t let the extra work scare you away from following your dream.
Have you bought a second home? We would love to hear about it.
More from Suburban Finance:
- What Should You Budget for Home Repairs?
- Renter’s Insurance for the Uninitiated
- What You Need to Know Before Selling Your Home