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:
- Down payment
- Mortgage principal payment + interest
- Property taxes
- Homeowners insurance
- HOA dues, if applicable
- Utilities (water, electricity, gas, phone, cable, security)
- Property management
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:
- Buy in an up-and-coming area. Hot vacation spots are always expanding. Buying a property just outside of the “hot zone” can give you access to the perks of a vacation town without the high price tag.
- Buy closer to home. Having a second home within driving distance not only makes it more likely that you’ll visit often, but it also slashes the expense of travel. Having a second home close by can also make it easier to manage and maintain the property.
- Avoid HOAs. Weigh the pros and cons of an HOA before committing to living with one. Sometimes the extra amenities just aren’t worth the extra expense.
- Consider co-ownership. Co-ownership of property means more than one person has an ownership interest. There are different types of co-ownership, including tenancy in common, joint ownership, community property and tenancy by the entirety.
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:
- Bank account funds
- Investment account funds
- Proceeds from sale of an asset
- Retirement account funds
- Home equity loan or HELOC
- Combination of any of the above