Buying a vacation home is a huge decision. After all, both your money and your invaluable leisure time are at stake. Before you put an offer in on a property, you need to evaluate whether or not purchasing a second home is the right move for you. Fortunately, we can help with that. Below is a list of financial questions to ask yourself before buying a vacation home. Read them over to help make your decision much clearer.
Can I afford to buy?
Unfortunately, financing a second home is often a bit more difficult than it was the first time around. The main reason is because both FHA and VA loans can only be used for a primary residence, meaning that if you have to finance the purchase, you’ll have to go with a conventional loan.
Conventional loans are a perfectly fine financing option, but they often come along with stricter qualifying standards. In order to qualify for these loans, you typically have to have a credit score of 620 or higher. Additionally, second-home loans often come with higher downpayment requirements, usually at least 10 percent.
In some cases, especially with condos and other properties governed by an HOA, you may not be able to finance your purchase at all. If you’re looking into buying one of these properties be sure to ask if there are any financing restrictions.
Can I rent it out?
Similarly, certain vacation properties may have restrictions on whether or not you can use the property as a source of rental income. If this is something that you intend to do, you’ll want to ask to see a copy of the HOA or condo association’s bylaws to check if there are any restrictions.
If rentals are allowed, how often you intend to rent it out is also something to think about. Be aware that if you rent out your vacation home more than 14 days per year, you become a landlord in the eyes of the IRS. At that point, you’re responsible for reporting and paying taxes on any rental income.
How will this affect my taxes?
The passage of the new tax plan has presented homeowners with additional things to consider when it comes to whether or not to purchase a vacation property. Previously, there was no limit on how much could be deducted in state and local taxes. However, now the limit is $10,000 in total. Depending on how expensive these taxes are for your primary residence, adding another property could easily put you over that limit.
If you’re mortgaging the property, your mortgage interest deduction is also something to think about. While, in the past, homeowners could deduct the mortgage interest they pay up to a limit of $1 million for a joint return, the cap is now at $750,000.
What kind of insurance do I need?
When you buy a new home, you’re going to have to make some changes to your homeowner’s insurance policy. If you and your family are going to be the ones who are primarily using the place, you may be able to get away with simply extending the policy you already have in place. However, if you’re planning on using the home as a source of rental income, you may also need to purchase a rental dwelling policy.
The location of your new home could have an impact on your insurance policy, as well. Depending on where you are located, you may need to have a separate rider for events like floods or earthquakes. If you’re financing the property, your mortgage company will let you know what, if any, supplemental insurance is required in your area.