Buying A Second House Or Vacation Home
Hanna KielarJuly 16, 2019
If there’s a place you can’t stop thinking about and just keep visiting, you may have considered purchasing real estate in that location so you have a spot there to call your own.
Or maybe your busy city life has you longing for your own cabin-in-the-woods retreat you can escape to every other weekend. Perhaps you’ve always wanted to own a beach house that serves as the destination for all your family’s summer road trips.
Lots of people dream of owning a second home or vacation property. But what does it take to make that dream a reality? Is purchasing additional property even a good idea? Let’s dive into the pros and cons and what you need to know to successfully buy a second home.
What Is A Second Home?
For the purpose of your mortgage, there are three different property types: principal residence, second home and investment property. These designations tell us who occupies the property.
Your principal residence is your primary home – it’s where you live for most, if not all, of the year. A primary residence, except in certain situations, is occupied by the person who borrowed the mortgage to purchase the property.
By contrast, investment properties are owned by the mortgage borrower, but the borrower doesn’t live there. Instead, investment properties are usually occupied by renters.
Then, there’s the second home. A second home is a property that the borrower occupies for a portion of the year, such as the weeks or weekends you spend there on vacation.
Though you won’t be there all the time, a second home must be suitable for year-round occupancy. It must be a one-unit dwelling and cannot be subject to any rental, time-share or property management agreements.
Depending on your lender’s rules, you may be able to rent your second home out for a certain number of days per year and list the property on short-term rental sites like Airbnb. But if you’re looking to rent the property the majority of the year, you’ll likely have to get an investment property loan.
Second homes are sometimes referred to as vacation homes, as they are often purchased in popular vacation destinations. If you’re using a mortgage to purchase your vacation home and don’t plan on renting it out full time, it will likely be classified as a second home.
Should You Buy A Second Home?
Having a literal home away from home can be great if you like vacationing in the same spot year after year. If you have the means, owning a vacation home can come with a lot of benefits.
Of course, that’s a big if. Property in vacation spots tends to be pretty pricey, and second home mortgages require higher down payments – at least 10% (though your lender may ask for more) – and typically come with slightly higher rates. You also may find that credit requirements are more stringent than they were with your primary home mortgage.
Once you have the house, there’s no shortage of ongoing care and maintenance needs to keep you (and your wallet) busy.
Property located in high-risk areas will need good insurance. Beachfront property is a dream for many, but hurricane season can quickly turn that dream into a nightmare. Find out what types of insurance you’d need for the area you plan on buying in and what it’s likely to cost.
You’ll also need to look into local property care services that can help you care for and maintain your second home while you’re out of town. Be sure to factor these costs into your prospective housing budget.
Even if you do have the cash, buying a second home poses a fair amount of financial risk. If you’re viewing the purchase as an investment opportunity, it’s important to do a reality check about whether you’re likely to see a return on that investment.
If you’re considering purchasing a second home or vacation property, you need to decide if you have the time and money to do so and if you’re comfortable taking on the risk that comes with such a large financial decision. It’s best to speak with a financial professional who can look at your individual financial situation and advise you on whether purchasing another property would make sense for you.
What To Look For
So, you’ve decided to take the plunge and purchase a second home. Now you’ve got some decisions to make.
If you’ve been considering buying a second home, you probably already have a location or two in mind. Now is the time to start doing as much research as possible about the areas you’re thinking about buying in and the types of properties you’re considering. Decide what your needs are and what you want out of the property.
Have you always dreamed of owning your own lakehousein a quiet, rural area, or do you prefer a condo in a lively beach town? Do you want a property that has lots of space for family or friend gatherings? Does the area need to be kid-friendly?
You might also want to think about resale value when considering what you want out of your second home. If you buy a home that’s going to have trouble attracting buyers if you ever want to sell it, that’s likely going to be a liability down the road.
Getting A Mortgage
Getting a mortgage for a second home is a slightly more selective process than it is with a principal residence. You’ll need to prove you’re a trustworthy borrower and have a strong credit profile. As we mentioned above, you won’t be able to go below 10% for your down payment, and you may be required to put down a full 20%.
If you’re still paying off the mortgage on your primary residence, you’ll need to consider whether your finances can handle two mortgages at once. Your mortgage lender will consider this as well and may determine that the burden of two regular mortgage payments pushes your debt-to-income ratio (DTI) into territory too risky to move ahead with the loan.
If you want to purchase a second home in the near future, it may be a good idea to take a look at the sum of all the debts you owe relative to your income and make a plan to pay down as much of your debt as you can.
If you want to rent out your vacation property and be able to use the anticipated rental income to help you qualify for the mortgage, you’ll have to get an investment property loan. This means you’ll take on a higher rate and have even stricter credit and down payment requirements.
Purchasing From Afar
You probably aren’t buying your second home right down the road from your primary home. In fact, a lot of borrowers won’t finance a second home located within 50 miles of your primary residence.
If you’re buying a vacation home, you’re likely going to have to do some travelling to get there. This can make finding and buying a house tricky. It takes a lot of time, money and coordination.
To successfully buy a house, you’ll need the funds to travel to the area you’re looking in – probably more than once. You’ll also need to either take time off work to go or commit to at least one jam-packed weekend where you do little else besides travel and do home walk-throughs. This can make the process stressful.
To make things easier, it helps to have a good real estate agent who is local to the area you’re buying in representing you.
Search online and look at agents’ profiles and reviews. Take your time to find an agent you can trust and who you feel you’ll work well with. Consider interviewing a few different ones over the phone to get a feel for their personality and business style before making a decision.
It can be immensely helpful to buy a vacation home in an area you’ve already vacationed in, especially if you’ve vacationed there more than once. Since you already know the area, you’re less likely to have regrets or encounter unpleasant surprises – though you should still educate yourself about any aspects specific to homeowners that you may have not been privy to as a vacationer.
If you’re buying in a completely unfamiliar area, you need to do as much research as you possibly can. If you’re buying in a popular vacation spot, you may be able to find information specific to buying vacation homes in that area. You can also check out local newspapers or online forums for locals to get a feel for what goes on there.
Once you’ve found a house and had your offer accepted, try to attend the inspection if you’re able to. While you will receive an inspection report, being there can teach you a lot about the home you’re purchasing and allows you to ask questions.
If you’re growing weary of all the travel, ask if it would be possible to schedule a remote closing near your primary home.
Take This Fun Decision Seriously
While you’ll hopefully have a lot of fun owning a vacation home and make many great memories, it’s important to take the decision-making part of this process seriously. Don’t make any big decisions based on an impulse.
Think about a vacation home like an investment and consider what your return on that investment will be, not just financially, but also in regard to your satisfaction with the property. Is the home likely to appreciate in value? Do you get enough vacation time to make owning a vacation home worth it? If the property is older, will you be able to afford any potentially costly repairs that need to be made?
Many people purchase a second house or vacation home and feel it was money well spent. However, there are also plenty of people who come to seriously regret the investment and end up pouring a bunch of money into a house they rarely get to visit. Taking some time to look over all the potential risks and benefits can help you make a smart, regret-free decision.
If you’ve thought it over and decided that it makes sense for you, you can get started online with Rocket Mortgage®, or speak to a Home Loan Expert at (800) 785-4788.
To start searching for your dream vacation home, check out our home search tool to see available properties in your favorite destinations.