A cabin in the woods, a cottage by the lake, a condo near the Las Vegas strip … for many, owning a vacation home is part of the American dream. If you find yourself in a position to purchase your ideal getaway, don’t let your emotions run amok. Just like your first mortgage, a second mortgage is a big decision that should not be taken lightly. Here are some factors to consider before getting the keys to your own personal paradise.
Location, location, location. As with any real estate purchase, you’ll want to make sure there is enough appeal for renters or future buyers. Look for properties with at least one great location factor: ocean views, access to hiking trails, frontage on a boating-friendly lake, etc. Buying a place within three hours’ drive of a major metro area is also a good choice if you plan on renting it out – perfect for weekends.
How to get the cash for a down payment. Many who buy a second home use a home equity line of credit (HELOC) drawn on their first home. Others have enough disposable income to save up and pay cash. The good news is that most of the time, your mortgage interest rate will be similar to rates on primary homes. However, lenders will still require that you stay in the desired debt-to-income ratio – total debt payments can’t exceed a certain percentage of your income.
Consider renting the place out. About a quarter of vacation homes are rented out for a portion of the year, depending on where the place is located and what amenities are offered. With vacation homes, you can rent the place out for up to 14 days a year without having to declare that income on your taxes. If you rent it out for more than 14 days per year, you qualify as a landlord and must report your earnings. However, the amount of time you personally use the property can affect how much money you have to pay in taxes – so do some research before you commit to the renters’ life!
A vacation home can be a welcome respite from everyday life – just make sure it’s a smart financial decision! As always, give us a call at 877.312.9033 and we’ll be happy to chat about your home ownership goals.