If you are considering owning a second home, it could be an ideal investment for your future. A second home can help you earn a side income while providing a break from your daily life. However, buying your second home does not come easy. There is a lot of planning that goes into it. Here are some things to keep in mind.
Where should you buy your second home?
A major decision to take is where to buy the next property. Do you want a home closer to the family or do you want one near the beach or in a city you thoroughly enjoy living in? Answering these questions will help you make the right choice. Discuss the cities or neighborhoods with your family and then spend time looking for properties. You can contact an agent in the location to help you find your second home. Researching before time will ensure that you choose an ideal location and team up with an agent in the area who will make the mortgage much easier for you.
How do you plan to use the second home?
Many buyers have a clear idea about their second home before they make the purchase but even if you are not sure, it is okay. You must consider all the available options and decide how you intend to use it. If you have a big family that loves to vacation often, you can call it your vacation property and pick a location that you like to visit or explore. The second alternative is a secondary residence where you might want to spend more time working or relaxing. If your job requires a lot of travel, investing in a second home could be a good choice. Many home buyers consider it as an investment property which means you can sell it at a later stage or use it as your rental property. Your mortgage will depend on the type of property you choose to invest in.
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Can you afford it?
Buying your second home should not damage your finances. Your money should be in a good shape if you are considering this move. Your cost of purchase is not just the value of your home but a little over it. Understand what the insurance and home warranty covers and keep these costs in mind.
Interest rate and down payment: Your second home will need a down payment as well as a mortgage. This means you will have to plan how to pay in cash. You will need to make a higher down payment since a second home is considered a higher risk for the lender. You might want to consider taking up a side hustle for a short time. The same applies to the interest rate. The rate of interest will be higher for the second home mortgage and you need to budget for the same.
Monthly budgeting: It is possible to be approved for a mortgage but you will still have to run the numbers and check if it fits in your budget and is something you can afford. The right way is to add all the monthly expenses and then subtract them from your salary. Even if you are considering a rental income in the near future, you still need to ensure that the mortgage payment is something you can afford because the property might not rent out as soon as you want it to. Besides that, consider the homeowners insurance, association fees, property taxes, as well as general maintenance costs when making a decision.
Debt-to-Income ratio: It is important to meet the debt-to-income ratio requirements if you want to qualify for your second home mortgage. The DTI is the amount of debt as compared to the money you make. You can calculate the DTI by adding up the monthly debts you pay and then dividing it by the monthly pretax salary. Lenders need a DTI of 40% or less in order to approve the second mortgage.
Maintenance: If you are planning to rent the property, you need to keep in mind that maintenance is a part of it. You will have to handle the repairs of the property as an owner. Set aside a part of the yearly rent for the maintenance of the property and in case your property does not rent out right away, you will have to incur out-of-pocket expenses. Repairs may cost more depending on the type of home and the maintenance it needs.
Investing in a second home can be a great way to expand the real estate investment portfolio while also setting up a second income stream. Follow these steps to make the buying process easier and quicker for you but never rush the process and take your time through each step.