- March 23, 2018
- Posted by: steve
- Categories: home loan, how to, mortgage articles
Becoming a homeowner is the American dream. Owning two homes? That’s putting extra icing on the cake.
There are a lot of reasons someone might need to get a second home mortgage.
Some families decide they need a vacation home. Children might get their parents a home close to them for health reasons, or they want a second home to build their real estate profile.
No matter the reason, there are things to consider before contacting a mortgage company.
Let’s look at things to consider when purchasing a second home, and how to go about the process.
Don’t Take Out a Second Home Mortgage on Impulse
Anybody who vacations on the sunny beaches of Florida dreams of buying a home there.
The problem is that not everyone should.
Before putting down the money and signing a contract, a family should think about the purpose of getting a second home mortgage.
Is the home an investment? If so, extensive research in the local real estate market should come before any decision.
A vacation home is only needed when the family goes frequently. Going once a year isn’t going to cut it.
Don’t rush into taking out a second mortgage. Consider all the options with an eye towards the future.
Smart Buyers Think Long-Term
Before taking out a second home mortgage, consider the next twenty years. Is retirement in the cards?
If so, the second home should be close to medical facilities.
Consider the property value of the neighborhood in the past twenty years. If it has gone down, consider finding another home to buy.
No matter the use of the second house, consider it an investment. That investment needs to grow for the investment to be worthwhile.
Look for Fixer Uppers Over Move-in Ready Homes
With the rising popularity of DIY and realty shows, fixer-uppers have become all the rage.
The reason to skip the move-in ready homes has nothing to do with trying to be the next property brother. It’s all about the cash.
A home that needs repairs will be cheaper. Prices on these homes tend to be more negotiable.
Get a home inspection and take note of any problems that go beyond cosmetic repairs. This information is useful during negotiations.
Figure out how much the repairs will cost (including labor) and explain to the seller that those charges should come off the price.
If they agree, the repairs paid for themselves.
The best thing about fixing a home up is personalization. A smart buyer can find a home that is cheap and make it into the house of their dreams.
Put the money saved into remodeling the home. Remodels often raises the long-term value of the property.
Before getting the second home mortgage, buyers should look into local regulations for building, adding to, and remodeling homes. The costs of the process outweigh the benefits in some areas.
There are some tax benefits to remodeling, however. If a home has historical significance, maintenance could lead to tax breaks. Contact a local historical society for help identifying these homes.
Using the Second Home for Income
If someone is only going to use the second home for a few weeks a year, renting it out is a great option.
Depending on the circumstances, there are a few options.
If the second property is close to the original home, renting it out on a short-term basis through Airbnb is a way to make quick cash.
Posting an ad is easy. Take pictures of the property, put them on the website, and add any rules (no pets, no kids, etc) to follow.
Sit back, wait for contact, and before long the money will start to come in. If the home is in a vacation hotspot, that’s even better.
Renting it out is another way to make money. If it’s a summer home, rent it out for the winter season. There are plenty of people that are looking for short-term six-month leases.
If the owner uses the home less than 14 days a year or 10% of the time it’s occupied, the IRS will consider it a vacation home.
Mortgage interest, maintenance, and other overhead costs are tax deductible at the end of the year. This will help cover the costs of managing the home.
Renting out the house for part of the year leads to a smaller deduction. Either way, it’s a nice benefit to have at the end of the year!
What’s in Your Wallet?
Before taking out a second home mortgage, buyers should know exactly how much free income they have.
Many people think of their bills in simple terms, such as power, water, cable, and car payment.
They don’t consider the gas that makes the car run, or the food they eat.
Those bills are just as essential as the others.
Writing down all expenditures for the last three months, along with all money brought in from every source helps.
Planning for the worst helps. An accident could cut income off for a month. Without proper planning, this could be catastrophic.
There should be enough extra income to cover the second home mortgage two-and-a-half times. This method will provide cover in case an unforeseen event occurs.
Don’t count on fluctuating sources of money, such as taxes or gambling income. Those sources are sporadic and change from year to year.
Many buyers, to spread out liability, team up with friends or family members to buy a second home.
Income from the house, tax deductions, and repair. This arrangement works for some, but it can fall apart fast.
Put all details of the arrangement in a contract, and sign it in front of a notary. No matter how well two people know each other, misunderstandings happen.
The contract protects both parties in case one side doesn’t hold up their end of the deal. If a buyer wants the option to buy the house after a set amount of time for retirement, that option needs to be in the contract as well.
In short, leave nothing to chance.
Maintain the Maintenance
One of the problems with taking out a second home mortgage is maintenance costs. As discussed earlier, tax deductions will offset these costs. There will need to be money for repairs throughout the year to fulfill landlord obligations.
The two biggest expenses when renting out a property is general maintenance and renting/evicting tenants.
Most repairs are quick and inexpensive. Toilets that won’t flush, clogs in pipes, torn blinds, etc.
From time to time, there will be phone calls at 2 am because of leaking roofs or a busted water heater.
All these things add up to serious money over time. One recommendation is that a renter keeps 3% of the sales price on hand for repairs at all time.
Finding suitable renters requires time and money. Going through applications, showing the property, and running background checks can be exhausting.
Evicting someone is even worse. There are different laws for each state about how and when an eviction can happen.
A lawyer will help fill out the paperwork for a price, and an upset tenant might trash the house, leading to expensive repairs.
One way to get around these headaches is hiring a property management company. For a fee, they handle all of the heavy lifting. If the second home mortgage is for a house that’s far away from the owner, this might be a necessity.
Factor this expense into the equation before taking out a mortgage for a second home.
The Good and the Bad About Getting Financed
Interest rates are low, which is good news for everyone.
The bad news is that lenders factor in the high risk of a second home mortgage defaulting before loaning out money.
That assumption means that lenders want a higher income threshold and credit score. Getting approved for a second home is harder than the first time.
When buying a home, using money from a retirement fund is a bad idea. Talk to an investment broker to ensure it’s a good idea. Having a healthy portfolio that shows solid dividends helps mitigate the risk of a second home.
Don’t assume a high resell value. While property investments have a history of growth, it’s not a guarantee.
Shop around for quotes and look for a local real estate agent who knows the market. A good agent knows what neighborhoods give the best return on investment and can help a buyer determine the best method of buying the home.
Local agents also have a good idea of where to expect future growth. There might be a neighborhood that is under-developed now but is getting help from the local government.
The homes in this area will cost less but grow in value over time. Why take a second home mortgage for $500,000 when $300,000 will buy a property that will be worth $600,000 in ten years?
Remember the first rule of real estate: location, location, location.
Some Hints for Finding a Second Home
Before getting a second home mortgage, get as much information as possible. Sites such as city data show crime rates for the past ten years, average income, and home prices of various neighborhoods in a city.
Look up average insurance prices for the area. If the second home is in Florida, hurricane and flooding insurance will be essential, even in the middle of the state.
The Northeastern and Midwestern states have unique problems, such as tornados and blizzards. Each region will require different types of maintenance as well. Don’t assume that buying a second home will put you on easy street.
Look for needed amenities. A home located in a good school district is a safe bet. For special needs buyers, there should be a hospital and specialist in the immediate area.
An easy method to find a good second home is to think of the selling process. Would it be easy to get someone else to buy it?
Don’t think of the positives, think of how the negatives could lead to uncomfortable questions. A buyer that can answer tough questions about their second home can fix any problems that arise.
Be flexible. A second home in Charleston is an amazing idea, but a house in Summerville that is bigger, cheaper, and has a better upside is the best bet.
It’s the same with neighborhoods. Not every house can be on rainbow row or Miami Beach.
Most important, a buyer needs their family’s input. The decision to get a second home mortgage will impact them too. They might see things that the buyer misses, saving a lot of pain later on.
Before making a decision, answer these three questions:
- Was the proper amount of research done?
- Is a second home sustainable?
- What impact will this decision have on the future?
Answering those three questions will make getting a second home mortgage an easier decision.
The Most Important Tip: Have Fun!
Getting a second home mortgage means something; life isn’t all that bad.
Buying a second home is an exciting time, and while there might be some anxiety attached to the decision, it’ll be alright.
It all boils down to doing the due diligence.
Looking at homes and going through the process is enjoyable. There will be a new home to decorate, a new place to visit, and a new sense of ownership.
Don’t fret over small things. Create a process for the decision and follow it. The results will take care of themselves.
Look at it as a new journey in life. Take time to enjoy the moment and satisfaction of being able to take out a second home mortgage.
It’ll be fine. Working with the right people will make the process easier.
Speaking of the Right People…
New Florida Mortgage has helped buyers realize their dreams for the past 50 years. With a dedicated team devoted to personalized service, navigating the Florida real estate market will be a breeze.
Don’t wait any longer to get a second home mortgage. Get in touch today for help every step of the way!