Buying a second home can be an excellent opportunity to invest in your portfolio through real estate, settle into a home for retirement, or live somewhere during specific seasons.
It’s an exciting prospect, but it requires taking on more responsibilities, understanding your assets, having tenants (depending on the situation), and more.
This blog post includes some financial and practical tips to consider before you decide to purchase a second home.
1. Know why you’re buying a second home.
There are many reasons why people purchase a second home. Over the past few years, more and more people have gone after the opportunity. Although the prospect can be exciting, it’s crucial to establish the purpose of your second home:
- Will this be a vacation home?
- An investment property?
- Do you hope to live in it after retirement but would like to use it as a rental property in the meantime?
Once you have decided why you plan to buy a second home, be sure it’s the right choice compared to potential alternatives. For example:
- If you’re purchasing a vacation home, consider how often you will visit the property before making the financial commitment. Would it be a better financial decision to rent an Airbnb a few times a year instead?
- If you want to purchase an investment property to flip and resell or use as passive income through rentals, have you considered the cost of repairs and labor?
Once you have made a list of pros and cons and covered the accounting responsibilities, you should have a clear picture of whether or not buying a second home is the right choice.
2. Make sure you can buy a second home.
Have you made your list and performed your accounting? That’s great! Let’s move on to the second, and most important, consideration: Can you afford a second home?
Although some people believe you should pay for a second home with cash, there are some major drawbacks to that choice. For instance:
- The price of a home would significantly reduce most people’s savings.
- That money isn’t being invested in other areas, such as retirement funds or a child’s college education.
- The cash will need to be used for home expenses in the future, such as roof leaks, water heater damage, home additions, and more.
The alternative is a second mortgage, which means you will pay for a second home along with your first. If this is the route you choose to take, consider the following:
- You most likely will need to put down at least 10 percent because a second mortgage adds more financial pressure on homebuyers.
- Lenders will also look for higher credit scores.
- Interest rates might be slightly higher than a primary mortgage.
Regardless of the choice you make, be sure to have an emergency fund for homeowner’s association (HOA) fees, homeowner’s insurance, utilities, property taxes, and maintenance. Also, consider housing and furniture expenses in your final financial assessment.
3. Start on the process of buying a second home.
Now, you are all set to begin the process of purchasing a second home. You might recognize the process—it’s similar to the process of purchasing a primary home:
- Set a budget that includes the home price, closing costs, emergency funds, and other necessary expenses.
- Complete extensive research on the area.
- Partner with a trusted, local real estate agent.
- Get pre-approved for a mortgage.
- Search for your dream property.
If the second home will be used as a rental property, the process of purchasing the home will look similar. However, know that mortgages for rental properties often come with higher interest rates.
If you’re purchasing a second home from a distance, there are several things to consider:
- Decide if you want to work with a management company (if you are a landlord from a distance).
- Know the local laws that apply to your rights as a landlord and your renter’s rights.
- Account for rental maintenance because you will be responsible for paying for all repairs and upgrades.
Ultimately, the best thing you can do when buying a second home is to partner with a trusted advisor.
Partner with a Loan Officer from radius!
As you know from purchasing your first home, the process is as exciting as it is involved. To make things easier, contact a Loan Officer from radius, a trusted lender that provides financial advice to make your goal of owning a second home a reality.
If you would like to look at a guide before speaking with us, consider downloading our mortgage preparedness guide, which offers a comprehensive approach to purchasing a home.