Top 6 things to know before buying a second home
You have been paying off your mortgage as a seasoned homeowner and are now considering purchasing a second home-a place you can escape to on holiday, an investment property, or maybe even a mix of the two. You've been through the home-buying process before, so you know what to expect, but there are some special variables that you'll want to consider when buying a second home. These variables will differ based on how you plan to use the house, so it is a good idea to decide if the home will be mainly for personal use or whether tenants will use it.
Before purchasing a second home, here are six important items you should consider:
1. Can I Afford It?
It might seem like a question that is simple, but can you afford a second home? Take the time to carefully consider the conditions if you want to take out a mortgage on a new home, so you will be better prepared for the process when submitting your mortgage application.
You are already well aware, as a homeowner, of the strict credit standards for taking out a mortgage, and when it comes to buying a second home, things get even more serious. Your debt-to-income ratio would, of course, be a major factor, and you will find it a little more difficult to balance this ratio when it comes to having two mortgages. Also, be prepared to fork out a heavy sum for a down payment, and if it is used as an investment property, you would be expected to put at least 10 percent down on a holiday home and maybe an even higher amount. And don’t forget that a second home will need to be protected, so you’ll want to talk to your homeowners insurance agent about getting a quote, once you’ve got your sights set on a second property to call your own.
2. Evaluate your needs and long-term goals.
Be realistic on what kind of second home suits your way of life. If you are looking for a weekend getaway, it might be a smart decision to stay within a day's drive of your primary home. If you choose your second home to serve as a retirement spot someday, determine the accessibility of the home and find out the area's health care facilities.
3. How is it going to affect my taxes?
It would be a further challenge to consider the tax consequences of your new house. If you plan to rent your place to tenants, that means that during the year you will receive rental income, and that income will be taxable. You will also be entitled to take deductions as the owner of the home, in the form of mortgage interest, property taxes, maintenance, depreciation, and running costs. As a landlord, one of the most important things to do is to keep detailed records of your income and expenses during the year in order to disclose the details on your tax return correctly.
4. Decide for yourself what sort of home is right.
When choosing between a condo and a single-family house, think about how much time you're able to devote to upkeep. For buyers who just intend to use their homes periodically and don't want to deal with year-round upkeep, condos are a good option. But if you don't want to risk confidentiality, stick to a single-family house.
5. How am I going to use the property?
This problem is not as important if the property is used exclusively for personal vacations. However, you'll want to consider your plan ahead of time whether you decide to rent the home regularly or full time. Bear in mind that your lender doesn't recognize the income created from renting the home for mortgage purposes. Based solely on your credit and debt-to-income ratio, whether you can afford the second property is determined. It is important to develop your rental strategy as early as possible to ensure that you have rental income that will help cover the monthly costs of the home from the beginning if you plan to rent the home.
6. Second homes can be a dicey investment.
Anyone who recalls the housing crisis recognizes that there is no guarantee of home prices. Values plunged by 33 percent nationwide after the housing bubble peaked in 2006, wiping out equity and driving homeowners into foreclosure.
Many experts agree that residential real estate is not inherently the best way to invest cash, so it may not be fertile ground for people who want to create wealth to purchase another home.