What you should know before buying a vacation home
Over the past year, many people have changed the way they look at their homes. In many instances, homeowners have looked to upgrade to accommodate their working and living arrangements.
Due to shutdowns and restrictions, many homeowners’ planned vacation getaways in the summer of 2020 were delayed or cancelled, leading to an increase in “staycations.”
With the easing of restrictions and increase in COVID-19 vaccinations, people are once again planning vacations — although many are looking to avoid crowded resorts and hotels.
This, coupled with the fact that many people are working remotely and may expect to at least some of the time in the future, is leading to an increase in vacation home sales.
If you’re considering a vacation home for your future getaways, take these factors into account before diving in.
How much can you afford?
First, make sure all your finances are in excellent shape to make yourself a more attractive homebuyer to sellers. Competition remains tight.
Then, figure out how much vacation home you can afford, which can be a bit trickier than determining your buying power for a primary residence.
This mainly stems from outside costs beyond your mortgage payment and utilities. Many vacation homes are in high demand locations, such as beaches or mountains, which brings environmental factors into your cost equation.
If your vacation home is in the mountains, for example, having a snow removal service on standby is likely a necessity. You may be able to roll these costs into a property maintenance and landscaping contract with a local company, but that’s an extra service cost you may not be paying for with your primary residence.
And don’t forget — your property taxes and insurance costs will now at least double, with beachfront homes adding an additional layer of costs for flood insurance.
Getting a loan
In many cases, people buying second homes will need a mortgage to pay for it. Is it hard to get a vacation home loan? Not necessarily.
However, getting a mortgage for a vacation home can be different from the mortgage process for your primary residence.
Mortgages for vacation homes and investment properties typically come with higher interest rates, stricter financing rules and require a 10 percent or more for a down payment.
Why? Because two mortgages for a homeowner brings elevated risks for the lenders.
How will you use the property?
How you use your vacation home, both short term and well into the future, is another significant factor to consider from a financial standpoint.
If you plan to use the home a lot for weekend getaways and family vacations and not primarily as a rental property, you may be able to get tax breaks for mortgage interest and property taxes.
However, these breaks likely won’t be available if you use the home primarily as a rental property. Your primary residence’s financials may also factor into the equation, so speak with your accountant and tax advisor to develop a sound strategy for handling the longterm finances for both properties.
Buying a vacation home can be an exciting, life-changing decision, providing a place to make a lifetime of memories with your family and a longterm, desirable location for retirement. It also comes with a lot of outside considerations. Lean on your mortgage lender, accountant and tax advisor to develop your vacation homebuying plan.