Buying a Second Home

Ray’s Take: Buying a second home for personal use or as an investment has become one of the fastest-growing trends in the U.S. According to the National Association of Realtors, more than 30 million Americans are expected to enter the second home market in the next decade.


You may think since you’ve been through the homebuying process before, that the second time around should be a piece of cake. Think again. Typically, second home loans require a better credit score and more money down. Lenders will be looking carefully at your finances to see if you can actually afford to pay two mortgages. They will want to make sure your debt does not exceed 40 percent of your gross income.


Also, be prepared for a higher mortgage rate to the tune of one-quarter to half a point. You will probably not get as competitive of a rate as you did on your first mortgage.


Buying a second home can actually be more expensive than you think. Make sure to review your overall budget with a second mortgage in mind. You always need to maintain a healthy emergency fund if an accident or job loss forces you to float two mortgages at the same time.


In addition to the mortgage, don’t forget about all the additional expenses that come with owning another home. This includes utilities, property taxes, maintenance fees, general upkeep and insurance.


For many second homeowners, renters can help offset a lot of expenses. One good thing about buying a second home is that it can actually help you out on your taxes if you live in it more than 14 days per year. You can deduct your real estate taxes and mortgage interest, as long as your combined mortgages don’t exceed a million dollars. If you rent it out for more than 14 days, you will have to report the income to the IRS, but you can deduct some expenses too.


Always consult with your financial adviser before considering purchasing a second home.


Dana’s Take: Ray and I have debated the idea of buying or renting a second home, versus staying in a hotel. Ray favors hotels and does not want to buy a second home, as one home gives us enough headaches. He is open to renting a second place someday, but even that could be problematic when you don’t live there permanently.


Today, with Airbnb and HomeAway, more vacation homes offer long-term rentals. Some people rent their places for a minimum of two weeks, and a hotel in London now offers rooms for months to world travelers.


The hotel option usually wins because of the flexibility. But I wonder if someday people all over the globe will move away from short-term rentals.


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