If you have one home, you may think you have all of the knowledge you need to make decisions regarding your second home. Unfortunately, that is simply not the case. If you haven’t bought your first home yet, consider reading my other blog post about buying a home now.
As with any home purchase, it is essential to consider your future as you make your decisions.
The decisions you make regarding purchasing a second home now can affect you for the next 20 to 30 years. Considering your goals and unique situation ultimately determines your decision when contemplating what to do with your second home – or if you want to buy one in the first place. Keep reading to learn more about buying, selling, and refinancing a second home.
What Second Homebuyers Should Know About Buying A New Home
Many different reasons explain why families and individuals buy a second home. For many, their second home acts as either an investment property or a vacation home. No matter how you choose to utilize your second home, you’ll have to have a clear idea of your goals. To obtain a loan, it is required you state the purpose of your second home.
The primary reason is investment properties often require higher down payments and interest rates. This is due to the elevated risk involved with an investment property. If you aren’t familiar with the qualifications, it is always best to consult with your real estate agent and mortgage lender.
The Pros and Cons of Buying A Second Home
In 2021, the median sale price for a residence in a nonseasonal town was $370,000. However, the average sale price for a home in a seasonal town was $417,000. These numbers show homeowners are willing to spend a decent amount of money for a second home.
Though not all are used the same way, buying a second home has many advantages. These include:
- Renting your second home. This is great for those who have homes near tourist destinations like the beach or the mountains.
- You can retire at your second home.
- Possible tax advantages depending on how you use your home
- Property is a viable asset. Your home will likely appreciate.
Just as there are benefits, there are also disadvantages. One of the main cons of owning a second home is the associated costs. Unfortunately, many homeowners falsely estimate the cost of their second home. This is especially seen in those who only consider the mortgage payment to be an expense.
Just as your primary residence, there are many costs associated with purchasing a second home that goes unrecognized. These costs include taxes, insurance premiums, utilities, maintenance, and even HOA fees.
What Second Homebuyers Should Know About Selling Their Second Home
Of course, second homeowners are sometimes faced with the option of selling their second home. While some prefer to rent their additional homes, others choose to rid themselves of their second property altogether.
As with any other decision regarding handling your properties, it is important to consider all of the relevant factors.
Taxes play a significant role in any home transaction. This is a major area of concern for those choosing to rent or sell their second home. When selling your home, you must consider capital gains tax. Homes that are lived in for longer than 2-5 years may avoid this tax.
However, if your home was used as a rental for the majority of your ownership, the same tax break may not apply.
The Cost Of Renting
For some, it is simply more economical to sell their second home because of rental costs. Renting a property can cost a great deal of money – these properties are not always profitable.
Of course, there is the initial capital needed to purchase the home, but there are also many other unforeseen costs. These expenses include unpaid rent, damages, replacing appliances, upgrades, and other general maintenance expenses.
What About Refinancing? What Should You Know?
When you refinance your home, you are essentially taking out a new loan against your property. This loan is often for the remainder of what you owe.
Hopefully, this new loan comes with better terms than your previous one. Your new terms will depend on many factors, including credit score and the current equity within your home.
Benefits of Refinancing Your Mortgage
Depending on your eligibility, refinancing can offer a variety of benefits, such as:
- Lower APR interest rates
- Lower monthly payments
- The option to cash out for equity for other uses
- A shorter payoff term
- Can help stretch monthly budgets for cash-strapped borrowers
- Some lenders are allowing up to 80% loan to value (LTV) on refinances
The Disadvantages of Refinancing
While refinancing has many benefits, there are also a few pitfalls you should keep in mind while considering this option. First and foremost, there are closing costs.
Most mortgage lenders suggest budgeting for about $5,000 worth of closing costs. Even if your lender offers a no-cost refinance, they are usually hiding it in the loan amount.
Understanding how these closing costs affect the total amount of your loan is essential. Costs that are too high may actually cause you to spend more money in the long term. It is also worth mentioning there is a limit to how much you can borrow.
Most banks will only allow you to take 70% of your home’s current value. If you spend the majority of all of your equity, you have to wait until your home value increases to borrow more.
So, Which Is Best?
Whether you plan on buying, selling, or refinancing your second home, it is essential to think about how each impacts your future. Consider calling a lender to see rate options.
When considering the transaction of property, you should think about how any decision will impact you for the next five to ten years – at the very least. As always, consulting a professional is always the best way to determine which option is the best one for you.