Paying for your Second Home

Owning a second home can be a dream come true.  How many of us have dreamed of having a hideaway from your everyday life?   Owning a second home gives you the benefit of complete control of the home plus it can be a great investment.     Over time, the home can increase in value as well as providing a steady source of income that is often enough to offset the cost of ownership.   

The dream of the vacation home can be tantalizing, but getting there can be anything but.  Once you find your piece of paradise, the next hurdle will be how to pay for it.  Paying cash is one option and it more popular than you might think.  According to the National Association of Realtors, 36% of all home buyers and 59% of all investment buyers pay cash.  While a cash purchase certainly gives you leverage when buying a home it also ties up money that could be put to other uses.  Borrowing part of the cost is a frequently exercised option.

Borrowing to buy your second home can be done with loans taken against your new property or against your principal residence or some combination of both.  If you have enough equity in your first home, borrowing against it with either a home equity loan or line of credit will be less complicated and come with more attractive rates.

If you choose to borrow against your vacation home to make the purchase, know that second home mortgages generally carry a higher interest rate than primary residence mortgages.  Since a loan on a second home is considered to be riskier than a loan on your primary home, lenders will usually require a larger down payment of at least 20%-30% of the purchase value in addition to a strong credit score.   You will also be expected to show that you can afford the second home out of your current income.  Rental income of vacation homes is never guaranteed, so lenders need to make sure you can afford the new property without the rental income.   Second home purchases are also not eligible for FHA insured loans.   If your second home choice is a condominium, lenders like to see that the development is filled with mostly owner-occupied properties which indicates stability and desirability.  Condominium complexes that are filled with vacationers and renters are generally a riskier proposition.  They will also want to see that the condominium association is financially sound.

With a little effort, you will finally be able to enjoy having your toes in the sand or gazing at an inspiring view from your own little piece of heaven.   In addition to relaxing in your own vacation home, you can enjoy rental income if you choose as well as the knowledge that you can deduct the interest on whatever second home financing you have chosen up to the 1.1 million dollar limit on all your home loans (restrictions can apply so consult your tax professional).   So will your paradise be the beach or the mountains?

Mickie-Ann Budny  – Litchfield Branch Manager, Vice President

NMLS MLO ID: 698742