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Editor’s Note: This story was originally point 2.
A second home can be a great investment as long as you research and plan ahead.
But it can also put you in financial trouble if you’re not prepared.
With that in mind, here are five things to consider before buying a second home.
1. What is it used for?
Second homes are typically used as vacation homes, secondary residences for work, or investment properties. If you’re applying for a loan to buy a second home, your lender needs to know what you plan to do with it.
For example, investment properties are typically viewed by lenders as riskier and therefore more difficult to finance.
Therefore, mortgage Villa Alternatively, secondary homes tend to have lower interest rates than investment properties.
2. How will you raise funds?
Many people will have to take out a loan to buy a second home.
You have several options depending on what you want to do with your second home. For vacation homes and secondary homes, they may qualify for regular mortgages, secondary mortgages, and even jumbo loans.
Alternatively, you may consider refinancing your current mortgage.
For example, if you have a sizeable amount of assets, you may be eligible for a Home Equity Line of Credit (HELOC) or Cash Out refinancing.
In the latter case, you’re essentially exchanging your existing mortgage for a new, larger mortgage, allowing you to take advantage of the assets you’ve built up in your primary residence. If you have enough home equity, this could allow you to buy outright secondary assets.
3. Do you have funds?
Whichever financing option you choose, it’s imperative that you create an accurate budget and be able to cover both the closing and ongoing costs associated with owning a second home. Consider the following points:
- down payment: Lenders usually require at least a 25% down payment for a second home.
- Debt-to-income (DTI) ratio requirements: Generally, you must have a DTI of 43% or less to qualify. second mortgage.
- Maintenance costs: Some parts of the second home may need to be refurbished or repaired before it can be used.
- utility: These are usually not expensive for vacation homes, but if you’re renting a second home, you’ll need to maintain utilities.
- insurance: Most lenders require comprehensive insurance whether you rent a second home or use it as a vacation home.
- tax: You may have to pay a transfer tax in addition to the normal property tax.
- extra: Think about furnishings, decorations, HOA fees, etc., as appropriate.
4. You don’t have to do it alone
Many people choose to split the cost of a second home with friends and family. This is a great way to save money and acquire assets that benefit everyone.
But no matter how intimate you are, it must be treated as a business arrangement. Otherwise, things can quickly become more complicated than convenient.
5. Plan when not in use
Whatever you do in your second home, it’s worth planning when you’re not using it.For example, if you are planning to lendyou should be prepared for the fact that a tenant may not be found immediately.
Likewise, if you are using it as a vacation home, what happens to the house while you are not there? Can it be rented out to other vacationers? Do I need to hire a management company to take care of maintenance etc?
Consider your options and make a solid plan.