Tips on making a smart decision when purchasing a second home
Are you thinking about purchasing a vacation home or a second property? There are benefits to buying a second home, but before you make your decision, you should weigh these factors:
Consider your goalsDo you want to buy a vacation home that will one day become the place you retire to, and perhaps even pass on to your children?
Purchasing a second home may come with perks, like potential tax write-offs, depending on how you use it. A second home for vacations is very different from an investment property that you buy to generate income. That difference can affect your finances in a number of ways, including the taxes you will owe on the property and the type of insurance coverage you will need.
Run the numbersFirst things first: Consider whether you can afford to take on a second home mortgage. Do you have a stable income and the financial cushion you’ll need? You should also be aware of the additional expenses of owning a second home, such as insurance, maintenance, repairs, furnishings and property-management fees.
Your state and federal tax rates (and how much of those taxes you can deduct) are largely dependent on the type of property you buy and how you use it. Consult a tax professional for guidance on the tax implications of a second home purchase.
Understand your mortgage optionsA professional loan officer can help you better understand the costs of purchasing a second home and the loan options available to you. You can also get prequalified or preapproved for a loan before you start looking at properties.
Your lender will look at your current financial situation and the property you want to purchase, and advise you on what type of loan you may be eligible for. (If you are a Bank of America Preferred Rewards customer, you may qualify for discounts on mortgage loan origination fees.)
When assessing your finances, your lender will pay particular attention to your debt-to-income ratio. Lenders generally want your debt (including the potential new mortgage) to represent no more than 36 percent of your monthly pre-tax income.
Your lender will also consider the loan-to-value ratio of the home you’re considering. Loans available for vacation homes tend to be more conservative than those for primary residences. Better loan rates are usually offered for lower loan-to-value ratios.
For jumbo loans on a second home, lenders usually require a larger down payment of 20 percent or more.