Personal Finance Library
Image default

Buying a Vacation Home: 6 Things You Need to Know

Save more, spend smarter, and make your money go further

A vacation home is a second property you own in addition to your primary residence. This home is often one that you use a few times a year.

Moreover, it can be located in a beach town, near a popular tourist destination, or somewhere tranquil and quiet.

Regardless, there are a few things you need to know before you purchase a vacation home. 

In this guide, we’ll walk you through the important considerations of buying a vacation home. We’ll also highlight the pros and cons of this significant purchase and provide tips for securing your second home.

Read on from start to finish, or use the links below to get started. 

About Buying a Second Home

Buying a second home requires you to make decisions like how to finance it, what you’ll use it for, and where you’ll buy. Considering all the costs and having a plan figured out will help you make your purchase with confidence and set yourself up for a successful future after buying your second home.

  1. What Are the Pros and Cons of Owning a Vacation Home?

Owning a vacation property can provide several benefits, but it may also have a few disadvantages. Take a look at the pros and cons of owning a vacation home below. 

Pros

  • Save money on future vacations–You can use the money you would’ve otherwise spent on an expensive hotel for other purchases, like a rental car, souvenirs, or food.
  • Earn a profit–If your vacation property is located in a popular area, you can sell your home for more than you bought it to earn a profit.

Versatile–Not only can you use a vacation home for personal use during the year, but you can also rent it out when you’re not staying in it. This allows you to earn some extra cash that can go toward paying off your new mortgage or other expenses. 

Extend your vacations–Since you’re no longer spending money on a hotel, you can increase the length of your holiday. 

Always have a place to retreat to–Your vacation home will always be there for you to retreat to when you want to get away from the hustle and bustle of life. 

Cons

  • Costly initial investment–Buying a vacation rental property is a costly investment that requires a significant amount of capital upfront. 
  • You have to worry about maintenance–Owning a home requires maintenance and the upkeep of your property. This is especially true if you’re planning on renting the home when you’re not using it. Unexpected issues may also arise when you’re not there.

Less money every month–In addition to your mortgage payments, you’ll be responsible for utility expenses, insurance payments, and more. At the end of the month, you may have less money than you’re used to. This can impact your monthly budget and savings plans. 

It’s a lengthy commitment–Owning property is a significant commitment that can last many years. Be sure that the location of your vacation home is somewhere you don’t mind returning to. 

Must know the law–If you’re planning on renting your property, you’ll have to take into account the federal, state, and local laws of where your property is located. You may also have to deal with legal contracts when renting. 

  1. How Do You Calculate If You Can Afford a Second Home?

If you’re thinking about purchasing a vacation home, you may be wondering whether or not you can afford it. To determine if your finances can handle a second home, take a look at the following points and add them together with your specific figures:

  • Down payment–In many cases, a down payment is required by lenders and could potentially require up to 20% or even more of the asking price. So, if the home costs $600,000, you could be required to put down $120,000. 
  • Closing costs–Before your mortgage loan is finalized, you’ll need to pay closing costs to cover origination fees, title fees, and so forth. Closing costs can generally range from 2% to 5% of the loan amount.
  • Property tax–You’ll have to cover property taxes on top of your monthly mortgage payments, plus you’ll have to continue paying this tax on your primary residence.
  • Rental income tax–If you’re renting your home, any income you make from this transaction needs to be reported on your tax return. 

HOA fees–Homeowners Association dues should also be accounted for if your vacation property is located in a community with an HOA. 

Possible maintenance costs–Make sure to add possible maintenance expenses into your budget. 

Homeowners insurance–Homeowners insurance is required by several lenders, and it must be maintained for the duration of your mortgage. 

Utilities–You’ll have to pay for utilities every month, whether or not you live in the home. 

Use this template for budgeting to calculate how much you can expect to pay on your second home every month.

  1. Can a Vacation Home Pay Itself?

A vacation home can pay for itself if you rent out the property when you’re not using it. However, it’s not guaranteed. To ensure your vacation property pays for itself, you’ll have to make more than whatever it costs to maintain the home monthly. For example, if your monthly expenses for the home add up to $1,000, your total earnings would need to at least equal that amount.

Keep in mind that renting your home is not an easy feat. When buying a vacation rental, it can pay off to pick a location where tourism is king. A vacation home located in a high-traffic area is prime real estate and can help you pay off your property. Consider purchasing in well-known areas, like Las Vegas, New York City, Palm Springs, and Miami. 

  1. How Do You Finance a Second Home?

In many cases, you’ll have to get a second home mortgage to finance your vacation property. This type of mortgage is slightly different from the one you obtained for your primary residence and has different requirements. The main difference between the two is that second home mortgages typically require a greater downpayment and have higher interest rates. That said, the process of getting a second mortgage is the same as a traditional mortgage.

Here are a few tips that can help you get approved for your second mortgage: 

  • Lower your DTI–Like your credit score, lenders will take a close look at your debt-to-income ratio to ensure you can pay off your second home. The lower your DTI, the less of a risk you pose to mortgage lenders. According to the Consumer Financial Protection Bureau, it’s important to keep your DTI under 43%.
  • Raise your credit score–A high credit score is essential to buying a second home. After all, mortgage lenders will use it to gauge whether you’re a dependable borrower or not. An ideal credit score is 640 or higher. If your credit score is lower than this, consider holding off on your purchase.
  • Maintain a solid mortgage history–Mortgage lenders will look into the payment history of your existing home. It’s essential that you pay your mortgage on time and in full each month.

The downpayment for your second home is often the most expensive upfront cost when purchasing a vacation property. Fortunately, there are a few ways to ensure you have enough money to afford the downpayment on your second home. This includes:

  • Home Equity Loans—A home equity loan requires you to borrow against your primary residence. This is only possible if you’ve built enough equity in your first home. 
  • Reverse mortgage—If you’re 62 or older, a reverse mortgage can be a suitable option for financing your second home. 
  • Cash-out refinance—With this financing option, you’ll be able to refinance your home for more than what you owe and receive the difference in cash. 
  1. Tips for Buying a Vacation Home

Buying a vacation home is easier said than done. So, here are a few tips that can help you:

  • Purchase a home under your budget 
  • Ensure it’s the right time to buy
  • Negotiate the house price
  • Talk to the locals about the area
  • Weigh the pros and cons
  • Use Mint to budget and determine if you can afford a second home
  • Work with an agent
  • Be honest with yourself about how often you’ll visit
  • Know what to look for with the help of a house shopping guide
  1. Important Considerations for Buying a Vacation Home

There are a few things to consider before buying a vacation home. Below, we’ve listed a few questions that can help guide you and determine whether it’s the right choice for you. 

Can you truly afford it? Vacation homes are expensive, so think carefully about whether you can truly afford one. Expenses you’ll have to stay on top of include insurance payments, HOA dues, property tax, and so on.

Does it fit into your long-term financial goals? Second home mortgages often have a higher interest rate, meaning you’ll pay more in the long run. Also, consider how the effects of inflation will affect your home.

Will you rent out the home? You’ll have to pay taxes on any income you’ve earned from renting the property. For tax purposes, it would be considered a residence if you use it for personal purposes for 14 days or 10% of the total days you rent it to others.

How do you plan to use the home? You may not spend as much time in your vacation home as you think. Regardless, you’ll still have to pay for the mortgage and any associated costs. 

Take the Next Step Toward Buying a Vacation Home

Buying a vacation home can be a great opportunity if you want to save money on future vacations or are looking to make a passive income by renting it out. However, it can also worsen your financial situation if you jump on the opportunity without proper planning. The second home mortgage process can also take some time. 

If you’re ready to take the next step and finance your second home, make sure to use the Mint app. With Mint, you can ensure you’re prepared to make this financial commitment and enjoy all the perks of your vacation property. 

Sources:  Consumer Financial Protection Bureau | Internal Revenue Service

Related posts

FHA Streamline Refinance [Rates, Closing Costs & More]

Nogwaya Charles

9 Tips To Be Financially Free And Pay Off Your House

Nogwaya Charles

How to Choose a Realtor: 8 Tips

Nogwaya Charles