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Buying a second home is a major purchase. While it's a nice idea to own a place for a weekend getaway or a month-long stay, knowing if you're ready to buy can be complicated. Financial planner Andrew Rosen has worked with a number of professionals, executives, and retirees over his nearly 20-year financial planning career. "A second home is something that comes with a lot of costs and a lot of blood, sweat, and tears," he says. But if renting a vacation home isn't the move for you, there are a few signs that you can afford to take the plunge and spring for a second home of your own. You're on track for retirement and other financial goalsBefore considering anything else, you have to be on track for your other financial goals, especially retirement. "If you know that you're on track financially for retirement through your current financial plan and savings rate, and there's enough discretion there that you can afford a second home, then I'd just look at it like another expense to plan for," says Rosen. Before your home purchase, it might be a good idea to check in with a financial planner. They can help you figure out whether you're saving enough for retirement, and determine if you need to save more in advance of this big commitment. You can afford the upkeep and maintenanceOne thing about homeownership is that things go wrong, and it's your responsibility to fix them. "We see what goes wrong with our normal homes, but [imagine] this at a home that you're not there for 300 days a year," Rosen says. When you're away from the property often, something is bound to go wrong, and it could be even worse than it would be in your first home since you're not there to catch the problem in its early stages. Given that, you'll have to save cash to keep up with the maintenance. It's not uncommon for financial planners to advise saving 1% to 4% of a home's value in a high-yield savings account to keep up with ongoing maintenance costs and any surprises. You don't need to rent it out to keep up with paymentsWhile many people find it logical to rent out a property that they're not living at through a homesharing site, it's not something you should count on. "Make sure that you can afford it without any other income stream for it," Rosen says. There's nothing wrong with choosing to rent out a second property, but making your payments shouldn't rely on rental income, since rental income isn't guaranteed. Choose a second home that you can afford without any rental income to make sure that you won't fall behind. You can meet the tighter mortgage standards for a second homeGetting a mortgage for a second home isn't like getting a mortgage on a first home. "They'll look at you more strictly for sure on a second home," says Rosen. That might mean that you need to have a higher credit score or a larger down payment to qualify. Mortgages for properties tht aren't a primary residence often aren't eligible for loans that have low down payment options, like FHA loans. Prepare to pay a higher interest rate on a second property, too. According to online mortgage lender and real estate information news site The Mortgage Reports, loans for second homes and investment properties typically have an interest rate 0.5% to 0.75% higher than the typical primary residence mortgage.
Liz Knueven Personal Finance Reporter Liz was a reporter at Insider, primarily covering personal-finance topics. Before joining Insider, she wrote about financial and automotive topics as a freelancer for brands like LendingTree and Credit Karma. She earned her bachelor's degree in writing from The Savannah College of Art and Design. She lives and works in Cincinnati, Ohio. Find her on Twitter at @lizknueven. If you’ve ever asked yourself, “Can I afford a second home?” you may have fallen victim to the myth that second homes are only for the rich. The truth is, with careful planning and financial savvy, a second home may be within reach. Read on to learn more.How much will your second home cost?Knowing whether or not you can afford a second home means crunching the numbers. Real estate prices vary widely based on the home’s size, quality and location, but don’t let the price tag mislead you. Smart second home shoppers know there are other expenses on top of the monthly mortgage payment.Here are all the expenses to factor into your second home budget:
Factor in the savings from your second homeWhen weighing a second home purchase, factor these savings into your budget along with the costs. Save on vacation expenses. When you have a getaway of your own to return to again and again, you won’t spend thousands on resorts or short term rentals. Instead, you build equity in an asset – one that may even increase in value. Add deductions. You can deduct mortgage interest payments on principal mortgage amounts of up to $750,000. If you choose to rent out your second home for more than 14 days out of the year, you can deduct rental-related expenses. Earn rental income. Many second home owners rent out their properties when they’re not using them, and use the income to offset expenses. (Note: Before you bank on using your property as a rental, check local ordinances to make sure it’s allowed.)Stretch your dollarOnce you know how much your home will cost, and you know how much money it’s going to save you, it’s time to learn how to increase your buying power. Here are a few tips:
Secure financing for your second homeWhen it comes to financing a second home, most people think of a mortgage first. But with tougher application requirements and higher interest rates, mortgages for second homes aren’t always the wisest financing option. Here are a few more funding sources that can be used alone or as a down payment to make financing a little easier:
Can I afford a second home?Now that you’ve done your research and learned some smart financial strategies, you might be surprised that you can answer the question, “Can I afford a second home?” with a resounding “Yes!” Another great surprise is Pacaso’s fully managed LLC co-ownership of a luxury second home. The costs of co-owning a Pacaso are straightforward and transparent. You own 1/8 to 1/2 of your Pacaso, with maintenance, management and day-to-day updates handled by our Crew. Our innovative Pacaso app lets owners book stays from 2 days to 24 months out in real-time, with no fixed selection periods. View our residential listings and see the benefits of owning a second home with Pacaso. |