Buying a second home is considered a great investment, whether you plan to use it as a vacation retreat or as a source of income.
When buying another home, keep in mind that it’s not only the purchase price that needs to be affordable, the ongoing expenses involved also need to be thought through.
That vacation home you’re eyeing might be small, but you still have to maintain it, insure it, pay its property taxes, and more. And because you’ll occupy your second home only part of the time, you might need to hire someone to keep an occasional eye on your property.
A word about mortgages
Mortgage approvals for second homes are not as stringent as they were a few years ago, particularly if you buy the second home as a vacation home instead of an investment property. The guidelines for purchasing a vacation home are more lenient, down payment requirements are more relaxed, and interest rates are better.
Moreover, if you use the place as a vacation home instead of renting it out, interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home. You can deduct all of the interest you pay up to $1 million worth of debt in total.
It’s the same for property taxes—as long as the second home is treated as a vacation home and not as an investment property, you can deduct property taxes on your second home.
A word about debt-to-income ratio
Lenders, however, will still be looking closely at your debt-to-income ratio, or the percentage of your income that goes into paying for your debts like credit card purchases.
Lenders want to know—are you capable of paying back loans in a timely manner?
If you can’t make those numbers work for any reason, then it’s probably not a good time to spring for a second home.