Are you thinking about buying a second home? With interest rates as low as they are now, it might be the perfect time to take the next step if you’ve been on the fence. Whether you’re looking for a vacation home, a place to retire one day, or an investment property, there are a few factors you’ll want to consider before starting this exciting process.
We spoke with Mitch Morris, Senior Loan Officer (NMLS ID #209875), who has deep experience with helping families obtain hassle-free home loans in Delaware, Florida, Maryland, North Carolina, Virginia, and Washington D.C. One of his specialties is helping people finance second homes, and he sees many families choose Delaware as their location of choice. Here are Mitch’s top five tips on how to start planning for the purchase of your second home.
Quick note: While some of the tips below mention Delaware specifically, this advice applies for anywhere you might be considering to buy your second home!
Tip 1. Decide if buying a second home makes good financial sense for you.
Can you afford a second home? Here are a few factors to consider:
If you plan on using a mortgage to pay for your second home, you’ll need to meet debt-to-income (DTI) requirements in order to qualify. Most lenders require that your DTI be 43% or less to be eligible for a loan on a second home.
A quick way to estimate your DTI is to add up all your monthly bills and debts, then divide that number by the amount of your gross (pre-tax) monthly salary.
Down Payment and Cash to Close
For most loan programs available on second homes, the minimum down payment amount is 10%. The greater your down payment, the lower your mortgage will be, which will reduce your monthly mortgage payment. A 20% down payment may prevent you from having to pay mortgage insurance, which can add a hefty amount to your monthly payment.
The cost of buying a second home involves more than just the purchase price of the house. You should consider continued expenses such as:
- Property taxes
- Homeowners Association (HOA) fees
- Maintenance and general upkeep
Did You Know?
You can refinance your current home and get cash out to help fund the purchase of your second home!
Download our Refinance Guide to learn about the refinancing process and how you might be able to make the value of your current property work for you.
Tip 2. Find the best location for your second home.
Choosing the location for your second home is a major decision. Do you want a property in the mountains, close the beach, or near a particular city that you really love? Are there family or friends that you want the home to be close to? Talk about different location options with your significant other or family members who are involved in the decision to purchase a second home.
Once you’ve picked a general location, spend time researching the best neighborhoods and getting to know the area. Even if you have visited the same spot for years, it’s helpful to get a local perspective before buying there. Visit in the off-season and speak with current property owners to get a good idea on how each neighborhood or area stacks up.
Other things to research include:
- Market trends like employment, housing prices, and taxes
- Nearby attractions
- Access to major transportation and highways
- Local schools
- Quality and proximity of medical facilities
You may choose one area over another based on what you find out in your research.
“Several of my clients have decided to buy their second homes in Delaware specifically because of the financial perks plus proximity to beaches and other outdoor activities,” says Mitch. “Low property taxes, no sales tax, and a low cost of living are major benefits that make Delaware attractive to people in search of a beach getaway as well as those looking for a place to retire in the future.”
Tip 3. Think about how you will use your second home.
What will your second home be used for?
Be realistic about your goals and lifestyle needs. These can impact the type of home you decide to purchase and may even determine the location.
For example, if you’re looking for a place to get away every weekend, you might want to stay within a day’s drive of your primary home. If you envision your second home as the place you’ll one day retire, make sure to check out accessibility features and look into health care services nearby.
Is your goal to use this as more of an investment property rather than a secondary residence and have it rented constantly? In that case, you may want to look into homes in close proximity to amenities and attractions.
“One thing I help clients figure out is whether their home will be classified as a second home or an investment property.” says Mitch.
“Areas like Delaware have great potential for income properties because of the beaches. Families who rent out their second homes for most of the summer like to spend a lot of time there during the off season. Mortgage requirements, tax deductions, and other factors vary based on how much time you spend at your second home, so it’s important to know how you plan to use the property ahead of time.”
Tip 4. Understand how a second home may impact your taxes.
Be sure to evaluate the potential tax implications of your second home. If you use the property as a second home rather than renting it out, you could be eligible to deduct mortgage interest and property taxes.
Some things to keep in mind:
- The Tax Cuts and Jobs Act caps the mortgage interest deduction at $750,000 of your total mortgage debt. For example, if you already have a mortgage for $750,000 on your primary residence and get a second loan for your vacation home, you won’t be able to deduct the interest on your second mortgage.
- Property taxes paid on your second home may also be deductible.
- The IRS has different tax rules for second homes deemed investment properties versus vacation homes. Make sure you’re aware of how your second home will be categorized.
Tip 5. Talk to your lender to get pre-qualified.
Once you’re ready to start looking for a second home, it’s a good idea to also start the financing process by getting pre-qualified. Talking with a lender early on in the process can help prevent any financial hurdles that may come up along your journey from house hunting to the closing table.
Getting pre-qualified also gives you an idea of how much you can borrow to purchase your second home, which is helpful for when you start house hunting. Having a pre-qualification or pre-approval letter in hand can also give you an edge once you’ve found your dream home and are ready to make an offer!
Once you’ve considered the above factors and have decided that you’re ready to take next steps, it’s time to get excited!
Learn more about your options for purchasing a second home. Contact our team of experts today!
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 06/20/2020.