Whether you are looking to buy a vacation home by the shore, or purchasing an investment property, there are a few things you should consider before buying a second home.
How do you plan to purchase the property?
Unless you are paying cash for your second home, consider that the standards to qualify for a second mortgage may be higher. Lending institutions typically use the housing expense ratio, which means your total house payments, including your existing payments plus any new payments you take on, cannot exceed 28% of your gross monthly income. You also should keep in mind that the loan amount that the bank qualifies you for and the amount that you can comfortably afford may not be the same. Consider your lifestyle and what sacrifices you may have to make if you take on a mortgage for a second home.
How will you use the property?
Keep in mind that home credits and tax credits may be different for a second home. While mortgage interest is deductible, it is capped at $750,000 for both properties. For instance, if your original home loan is $500,000, and you purchase a second home with a $300,000 loan, interest on $50,000 of your second home is not deductible.
There are also implications if you plan to use the property as a rental. If you occupy the property and rent it out for 14 days or fewer throughout the year, the rental income is 100% tax free. However, if you rent the property for more than 14 days in a year, the income is taxable and the deductions are limited. Also, if you are purchasing a home as an investment property, a financial advisor can provide guidance on how it may compare to a more traditional investment.
Are you prepared for the additional expenses of a second home?
When considering whether to purchase a second home, understand your long-term goals of the property. There can be high transaction costs associated with buying a second home so you ideally want to be in it for long-term rather than selling it after just a couple of years. And don’t underestimate how much it costs to own and maintain a second home.
- Home insurance – in general second homes are more expensive to insure, especially if they are vacant for periods of time; you also may need an additional vacation or investment policy, depending on how the home is going to be used
- Property taxes
- Homeowner Association fees may be applicable
- Property Management fees, if you are using it as a rental property
- Security monitoring
- Routine maintenance, repairs, renovations and decorating – for rental properties, it is advised that you set aside 2% of the sale price for maintenance
- Plan ahead for emergencies or the sudden departure of a renter by setting aside funds to cover about 6 months worth of expenses
There are a lot of benefits to owning a second home – from the extra income to the time spent at a vacation property with family and friends. Just be sure to consider all aspects of the purchase before making a decision. Of course, Ohio Real Title is always here to help if a second home purchase is in your future!