Eagle Eye RIA

Eagle Eye Advisory comprehensive planning includes second home analysis.

  • Can I afford a vacation home?
  • How much should I put down?
  • What are the tax implications?
  • How will this impact my overall plan?
Second mortgage interest rates on average tend to be about a quarter to a half a point higher than the interest rates on first mortgages.  You will have to prove to the bank that you can cover both your first and second mortgages with money to spare.  In the days before the housing crisis it was easier to leverage a first home purchase to finance a second home purchase.  Currently, lenders are more conservative when deciding whether to issue loans for second homes.

The good news is that, just like interest on your primary home, the interest on your second home mortgage loans is tax-deductible.  If you rent it out and use it for business income for 14 or more days per year instead of using your second home as a vacation home, you will not be eligible to deduct all of the mortgage interest.  You will, however, be able to deduct rental expenses related to the upkeep of the property during the days it’s occupied by tenants each year.

Payments on your fixed second mortgage usually can be made over the course of 30 or 15 years.  It all depends on what you can afford to pay every month.  A fixed mortgage with a 15-year term will come with higher monthly payments than a 30-year mortgage.
If you are purchasing your second home before you retire (while you are still in the workforce), a strong case can be made for the 30-year payment plan so there is less of a dent in your budget every month.  However, you will pay more in interest with a 30-year mortgage than a 15-year mortgage.  Keep in mind that qualifying for a second mortgage may require you to refinance your first mortgage to reduce the monthly payments on your first home.
The rules for obtaining a mortgage on any second home are much more strict than what you might have experienced when acquiring your primary home mortgage.  Banks evaluate applications for second mortgages differently.
It is assumed that if you are trying to buy a second home then you have achieved financial stability.  However, second-time home-buyers have to split their income between daily expenses, a first mortgage (if payments are still being made) and their second mortgage.  Some banks and lenders may assume that if an unexpected financial crisis hit, the mortgage applicant would have to trim the fat and that the mortgage payments on a vacation home would be a low priority in such a case.  That makes lenders wary of issuing second mortgages to just anyone.
You probably will be asked to create a breakdown of all assets and yearly income.  It is not impossible to get a loan with a lower credit score, but on average, a credit score of around 725 or 750 is expected from applicants for second mortgages, though the exact credit score minimum depends on the individual bank.
Flexibility: Unless you are fortunate enough to vacation whenever you wish, owning your own vacation home can restrict you to vacationing in the same area year after year. If you are truly in love with a particular area this may not be a problem.
No Maintenance: The repair costs associated with a vacation home can be expensive.  Repair and maintenance costs in “vacation” hot spots are typically higher than what you might pay in other areas.
No Association Fees: Depending on where you buy a vacation property, you may be required to pay an extraordinary amount of money in monthly or annual condo fees and other related expenses. This is especially true if the vacation property is part of a complex that offers additional amenities such as indoor/outdoor pools, tennis courts, fitness centers, and other costs.
No Taxes: If you only spend a couple weeks a year at your vacation home, you could easily end up paying more in property taxes alone over what it would cost you to rent a similar home for the same amount of time.
Less Financial Commitment: You might be surprised what you can rent for $1000 t0 $1500 a week in many areas around the country. Buying a vacation home will usually require a large down payment, low debt to income ratios (DTI), and a huge cash reserve.
No Surprises: When you own your own vacation home, you never know what you will find when you visit the property for the first time in a couple months. You may find that a water line has leaked, the roof failed, or the HVAC system is broken. You can pay thousands extra for a professional care taker to watch after your property while you  are not there, or you can take that same money and rent a vacation home instead.
An increasing number of second-time home-buyers are handling their transactions in a lump sum of cash.  Before applying for a mortgage, a down payment is often required, and in the case of second mortgage the required down payment may be higher than what you had to put down the first time.  The down payment on second mortgages can be as low as 20%, but can clocks in around 32%, particularly on jumbo loans.

It is a good idea to choose your new property wisely.  If you love your second home, all of the mortgage payments will be worth it in the end as long as you can make it work financially.  A second home can be the ultimate reward for all of your hard work.