Buying a second home can be a smart investment! But there are important factors to consider before making your move.
Whether you’re a lake person looking for that Minnesota getaway, a snowbird seeking a warm escape from those North Dakota winters or anything in between, let’s explore some helpful tips for making your second home purchase a success.
5 Tips for Buying a Second Home:
Set a budget
Make sure you can comfortably afford the cost without stretching yourself too thin! Start with the basics: Review your income, savings and expenses. Also, account for any debts you may have, such as student loans, credit cards or your primary mortgage.
Once you have a grasp of your finances, you’ll need to set a clear and realistic budget. Along with the price of the home, your budget should include long-term costs that can add up over time – such as property taxes, association fees, insurance, utilities, maintenance and repairs. Not to mention, the cost of traveling to and from the property.
Get a better idea of how much home you can afford with our home affordability calculator!
Consider financing options
If you’re not paying for your second home in full with cash, you’ll need to get pre-approved for a home loan to know how much you can borrow. Lenders usually want a down payment of at least 20%. (Psst. At Gate City Bank, we only require 10% down on a second home!) Also, your debt-to-income (DTI) ratio will likely need to be around 43% or lower. And while a credit score of 620 is often the minimum for conventional loans, a higher score like 700 or above is typically required, as lenders consider second homes a bit riskier.
Ultimately, when buying a second home, lenders want to make sure you can cover the monthly payments for both your first home and the new one. They may also want you to have enough savings for two to six months of payments, so they know you can still pay the mortgage if your income or expenses change.
If you plan to rent out your second home when you’re not using it, talk to your lender to see how it may change your mortgage terms.
Find the right location
When choosing where to buy your second home, think about what matters most to you. Do you want warm beach days? The excitement of city life? Or maybe beautiful mountain views? Look into things like local attractions, schools, safety, property values and other factors to help you decide. The goal is to find a place that fits your needs and lifestyle.
And if you’re instead looking to buy a commuter home or a place close by for an older loved one, think about things like how near it is to your job or health care facilities. Ultimately, working with a local real estate agent can help! Especially if they specialize in second mortgages and are willing to help you negotiate a better deal.
Think about the future
When buying a second home, think about your long-term needs. Do you want extra bedrooms, more entertainment space or a big yard for hosting family or friends who might visit? And if you can’t travel to the property as often as you get older, should you hire someone to help with yard work and repairs?
Also, does the layout of the home meet your long-term needs? For example, if climbing stairs might not be as easy in the future, a one-story home may be a good idea, with important rooms like the laundry room and master bedroom on the main floor. Asking yourself these questions can help ensure the home will work for you as your needs change.
Understand the tax implications
Owning a second home has some tax rules. You might be able to deduct mortgage interest or property taxes, but you could also pay higher property taxes depending on where the home is. It’s a good idea to talk to a tax expert to know what benefits or costs you may have.
Buying a second home is a big decision, but with proper planning, it can be a great investment. By following these tips, you’ll be on your way to owning a home that brings happiness and value for years to come.
We’re here to guide you! Let’s get you started by finding a local mortgage lender who can help you learn more and get pre-approved today. (Even if you’re planning to pay cash, it may make sense for you to connect with a lender to gather advice you may not have thought of through this journey!)
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