Don’t Sing the Second Home Blues
If you’re in the market for a vacation home, you can save yourself a ton of headaches by taking the time to understand the process and making sure you set yourself up for success. Here are a few tips and tricks if you’re in the market for a second home.
Know your financing
When it comes to buying a vacation house, there are a couple of different ways to finance the purchase. If you have a sizable savings, cash is always an option. However, if you’re going to take out a loan, you should know the types of lending products available.
A conventional mortgage may be the way to go if you have a credit score higher than 620. The higher the score, the better your rate. Typically, with a conventional loan, you will be required to put down between three percent and 20 percent, plus cover closing costs. An FHA loan requires a credit score of 580 and may allow you to come out with less cash from the get-go. However, an FHA loan is more restrictive than a conventional loan.
If you plan to build your dream vacation home, you will need to take out a construction loan, which is actually two loans in one. When you apply for a construction loan, money is drawn by your contractor directly from the bank. You usually have one year to complete the build. During this time, you’re responsible for interest, and the loan may convert to a conventional 30-year loan once the home is complete. Nerdwallet explains the different routes you can take when utilizing a construction loan.
Set a budget and stick to it
Your most important task before setting out on your journey of buying a vacation property is to determine how much you can afford. This is simply a matter of math, and requires figuring out your total gross monthly income by calculating your recurrent expenditures against your maximum allowable debt. Redfin’s home affordability calculator can crunch the numbers for you. Knowing what you can afford ahead of time will save you time and ensure you only look at properties that you can afford.
Decide on how to maintain your home
If you plan on buying your second home strictly for your personal use, there’s not really that much to consider other than property maintenance. But if you plan to use it to earn an income, or at the very least, offset your monthly mortgage, you must also consider tax implications, cleaning, supplies needed, service fees (if leasing through VRBO or similar), and additional insurance. The Washington Post can walk you through these and other expenses.
Questions to ask yourself
Before making the leap into second-home ownership, there are a few questions you should ask yourself. According to HGTV, these include:
- How will you get there? Approximately half of all second homeowners choose a location within an hour’s drive of their primary residence. Having a home with easy access is especially important if you plan to make frequent long-weekend visits. However, if you choose to live in your second home for half the year, distance may not be that important.
- Will the location suit your future lifestyle? You may enjoy hitting the links now, but if your interests change and you lean toward boating, your golf course bungalow may wind up being a burden. Try to choose a second home with access to a variety of practical and recreational amenities.
- Will you need rental income? If you think you’ll fall short on the mortgage, you will need to prove to your bank that the home has potential to earn an income to offset the additional costs. Plan on purchasing a property in a high-demand area, such as on a lake, near a river, or in a mountain range.
By looking ahead and being realistic about what you can afford, you can enter your second-home search with enthusiasm. Remember, stick to a budget and answer the hard questions first.
If you have any questions you can contact Jim McKinley at Moneywithjim.org
I hope you enjoyed the post.
Happy Travels or should I say happy purchases,