Interest rates are at historical lows and you might be thinking of purchasing a second home mortgage. Before you commit to another loan, evaluate the circumstance to ensure your reward is worth the risk. Identify your current financial circumstance, future life goals and implications for a second mortgage. Let us begin with a few questions to direct you in your decision.
The primary reason for a second home purchase is to vacation, according to the (NAR) National Association of Realtors. Securing a vacation home, not only ensures a free stay in your preferred location, but will increase equity and contribute to tax deductions.
The second most popular reason for a second home was the intention to retire to the home as a primary residence. 57% of all second homes were owned by baby boomers, whom are nearing or have reached retirement, according to NAR. Upon retirement, income will be supplemented by social security and retirement savings. Thus, many seniors prefer to downsize their home and cost of living to a more affordable living.
Purchasing a second home to rent for supplemental income is very popular, however it was not listed as number one, simply because the mortgage industry will categorize this as a "residential rental property" rather than a “second home”. Second homes are almost identical to rental homes, however the reason for dividing the properties by name is merely for tax implications with the IRS and government assisted loan programs. We discuss investment property in a series of articles within its own section.
If you consider your new liability as an investment, you will enjoy the financial benefits. Purchasing a second home will allow for annual tax deductions of interest paid. Interest rates are currently at historical lows and are sure to rise in the near future, thus it acting now will save you thousands of dollars in the years to come. Investing in property before the market value rises is also very profitable. Reselling the home when home prices are at a peak can net you tens of thousands. If you have considered converting one of your properties into a rental home, the tax breaks and rental income will be very profitable as well.
Do you plan to vacation, retire or rent out this property?
Besides the financial implications of tax or interest rates, you must consider the home itself. Will it be located in a location that attracts crowds on vacation or are you looking for a quiet retreat? As an income property, a popular location will be more profitable, but if you wish to retire or simply retreat, consider a peaceful destination. Planning your use for the home will also help to allign yourself safely with the IRS and strategically with the correct loan program. Ivestment properties have similar, yet separate loan programs.
Can you financially secure a second home?
A second home is a long-term commitment and a risky venture. Pulling equity from your first home may secure the second home, but evaluate the feasibility of paying off both mortgages within the given repayment period. Consider selling one of the mortgages in years to come or converting one home into a rental property for supplemental income. According to the NAR, the average second-home owner has a median income of $100,000 and provides a down payment between 20-50% of the home value. Approval for an additional mortgage becomes difficult due to the required loan to value and debt to income ratios. Good news is, interest rates should be similar to your first mortgage, unless you are planning to use the home as rental income, expect a slightly higher rate.
Are you prepared for the additional costs?
As you can imagine, a homeowner with two mortgages will incurr twice the financial burden. Unless ofcourse, the house is bought in full. Otherwise, the second home will double your cost of utilities, landscaping, maintence, repair, property tax, insurance, interest and monthly payment. Furnishings, home improvements and mortgage closing costs will also be necessary upon purchase. Be sure to budget efficiently and evaluate the feasibility of covering the costs independent of the home's purchase price.
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