Buying a Second Home: 8 Things to Know Before You Start

Buying a second home can be a great way to give yourself an exciting vacation spot or a source of passive income. However, buying a second home is often more complicated than buying your primary residence—and has higher financial requirements—so you’ll want to plan your strategy well.

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Here are eight things you should know before buying your second home.

1. Second home mortgages are usually harder to qualify for.

Requirements for a second home mortgage are usually stricter than for a mortgage for your primary residence. Depending on your lender, you’ll likely be expected to put down at least 10% as opposed to as little as 3% with primary residence mortgages. On top of all that, credit score standards are tighter, which reflects the increased financial risk that comes with having a second mortgage.

You also generally can’t use government-backed VA of FHA loans for a second property, although there are some exceptions. That means you’ll usually be relying on conventional loans, which have tougher qualification standards and higher down payment requirements.

You’ll want to talk to real estate professionals early in the process to make sure you’re all set. Clever Real Estate, for example, can get you in touch with local realtors who are familiar with your desired area and lenders who can help you with buying a second home. Their market expertise can be a big advantage when trying to buy the second home that’s right for you. Fill out a quick form to get your free Clever agent matches today.

2. Current interest rates make second homes less affordable.

The financial landscape has changed dramatically in recent years. Current average interest rates are 6.26%, which is a significant change from five years ago when they were 2.72%.

Higher interest rates add a considerable expense to your overall housing costs. For example, on a $400,000 mortgage with a 3% interest rate, your monthly payments would be around $1,686.42. But at 6%, monthly payments are 42% higher at $2,398. And over the life of your loan, you’d also end up spending 123% more on interest: $256,240.80.

While higher interest rates certainly add a new challenge to buying a second home, they don’t need to deter you entirely. Instead, you should work with a financial advisor and real estate agent to determine when the right time is to apply for a mortgage. Plus, if you end up with a high-rate mortgage, you can consider refinancing your home in the future to get a lower rate. You can also keep your payment low by putting more money down or buying mortgage points to lower your rate.

3. Ongoing costs could be higher than with your primary home.

When people think of buying a second home, they often just look at the home’s price tag. But you’re also doubling all the other costs associated with being a homeowner. Unless you’re planning to rent it out and have your renters cover utilities, this includes ongoing costs such as the following:

• Utilities
• Maintenance
• HOA fees
• Insurance

When you buy a home, you’re committing yourself to spending about 1% of that home’s value on routine maintenance, regardless of whether or not it’s your first or second home. And if you’re planning on renting it out, your maintenance costs could climb even higher. Tenants put a lot of hard miles on a rental, which will necessitate more maintenance than usual.

Depending on the climate where your second home is located, heating and AC could be even more expensive than for your primary residence. Even if your second home is vacant, you’ll still need to have at least some utilities running in order to avoid humidity and temperature damage and to deter trespassers.

4. Insurance costs are higher with a second home.

Insurance on a second home generally costs more than homeowners insurance for your primary residence. There are a lot of reasons for this. For example, second homes are often vacant part of the year, which can add to risks. And they’re often located in vacation areas that can be more prone to flooding or wildfires.  

If you’re planning on renting out your second home, tenants can add even more to your insurance costs since most homeowner policies don’t cover short-term renters. Of course, the rental income should be enough to cover the higher insurance costs.

It might also be a good idea to increase your life and disability insurance if you buy a second home. That’s because you’ll want insurance that covers the cost of owning and maintaining two homes. 

5. You'll need to increase your emergency fund.

Don’t make the mistake of assuming your emergency fund for your primary residence will cover both homes. Instead, you’ll need to either start a second emergency fund specifically for your second home or increase the size of your current one.

A rule of thumb is to put away 1-4% of your home’s value annually for emergency maintenance expenses. This can include everything from when the roof springs a leak to when a refrigerator dies unexpectedly.

Also, consider that when emergencies do happen, travel expenses may be a serious consideration. Costs for gas, car rentals, or plane tickets can add up quickly if you’re having to visit your second home repeatedly in order to deal with an emergency or repairs.

6. Be realistic about your rental income on a second home.

Many Americans buy second homes with the intention of using short- or long-term rentals to defray the costs of the mortgage and maintenance. If you’re planning on using rental income to pay for your second home, you should make sure you can cover your expenses if you hit a dry spell of vacancy.

Make sure you’re realistic about how much rental income you can bring in. If your property is in an area that relies on seasonal tourism, such as a beach or ski resort, you may have long stretches with few bookings.

Rent loss insurance could be an option for you here, but it’s also another expense you’ll have to pay. Talk to your insurance agent to find out if rent loss insurance is a good idea for you.

7. You’ll have different tax obligations with a second home.

Second homes come with unique tax obligations, for better and worse. On the plus side, if your second home is for personal use only, the interest on the second home mortgage is tax-deductible as long as it meets IRS mortgage caps. This can be a very sizable and valuable tax deduction! But always check with your financial advisor to see if your home would qualify.

However, if you’re renting it out for more than 14 days a year, it becomes a mixed-use property, which means you can deduct a portion of the mortgage interest depending on how many days were personal use vs. rental use. And you’ll also be able to deduct maintenance and upkeep expenses associated with the time you rent the property out.

You can also deduct property taxes, though there is a cap on the amount you can deduct. Make sure to consult with a tax professional as tax obligations vary by state and county.

8. Visit the area in the off-season before you buy the second house.

If you’re buying a second home to use as a personal vacation getaway, visit the area in the off-season first. Observe the market, talk to locals about the area’s prospects, and take in the climate—and then ask yourself if your second home still looks like a sound investment. The in-season never tells the whole story.

For example, during the off-season, shops and restaurants may be closed, the weather may be cold and rainy, and the area may feel deserted. If it’s in a mountainous area, it could even be difficult to access after heavy snowfalls. The result may mean that you don’t get as much use out of your second property as you’d hoped for.

Plus, the off-season can have financial ramifications. If you’re planning on renting out your second home, you should expect long stretches of vacancy during the off-season. And even if you’re not, a home that’s in an area with only seasonal interest could be harder to sell in the future.

That’s not to say you should feel discouraged from buying a second home in an area with a tough off-season. You’ll just need to go into the process fully aware of what to expect. Talking to a real estate agent early on is an excellent idea, especially one who is familiar with your target area and who can help you navigate the local market.

Disclaimer: The information provided in this article is for informational purposes only.  It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Consult a licensed financial advisor or tax professional regarding your personal financial situation before making any decisions.