There’s a lot more to purchasing a vacation property than simply having another place to getaway to chill out. Whether you choose to buy a detached home, townhome, condo, or a luxury home with an ocean view — the following are some variables you need to give some thought to:
An Extra Debt Obligation
• Are you going to live in your vacation home only as a second home or are you intending to rent it out to others while you’re in your primary residence. You may need to store your second residence’s personal items in a locked room or garage, and have it furnished with common household items and safety features for prospective renters.
• Keep in mind that there may be additional expenses on top of your monthly mortgage payments on the property — like insurance, HOA dues, cleaning, repair, and maintenance services, and utility bills for electric and water.
For luxury homes near the ocean in Gulf and Atlantic Coast states, a common deal-killer has been the high flood-insurance premiums. Fortunately, this is not a big factor for coastal cities in California such as ( Santa Barbara and Encinitas), Oregon (Cannon Beach and Lincoln City) and Washington (Aiki Beach and South Beach).
• Be mindful of your monthly income to make certain that you’re in a position to handle the extra costs.
• Depending on the money you pay for hotels or holiday rentals, being the owner of a vacation home may turn out be a better value over time. Renting your property when you’re away could create another source of income.
With a vacation home, you may even be able to write off some taxes, assuming that during the year you stay in the home a minimum of 14 days, or 10 percent of the time that you have a tenant renting it out. Specifically, interest paid on a mortgage for a second home is tax-deductible up to the first $1 million of financing. If interest rates are higher on a second-home mortgage than on the primary home, then borrowers may wish to prioritize those payments on tax returns. Always confirm with a registered tax advisor about deductions and your strategy.
For most jumbo lenders, the requirements often change according to occupancy. For example, a high net-worth borrower is seeking a mortgage for a vacation home (i.e., a second residence) that requires super jumbo financing. The maximum loan amount obtainable would be around the $3-4 million area with at least a 40% down payment, coupled with a 700 credit score and substantial liquid reserves.
Having said that, the maximum loan to value on a conforming-sized mortgage for a second home can drop to as little as 10% down on a second home, while most jumbo loans require a higher down payment than a conforming sized loan. However, In most cases, interest rates for a second home tend to be similar to a primary residence.
If a lender determines your second home to be an investment property, the down payment, credit scores, interest rates, and liquid reserve requirements increase further, while the maximum loan amount falls to $3 million or less.
Locations Where Vacation Homes Likely to Increase
Those over 50 years old represent the largest number of vacation property owners and are from the “Baby Boomer” generation. While the largest percentage of baby boomers are moving to cities in Florida and Arizona, markets poised to see an uptick of baby-boomer home buyers are Albuquerque, New Mexico., Boise, Idaho, and Denver as leading markets, according to a recent National Association of Realtor study. Baby boomers represented 30% of all home buyers in 2014, NAR reports.