Don’t Overlook These 3 Key Things When Buying a Vacation Home

With the summer approaching and vacation on your mind, we thought it would be a great time to discuss vacation home loans (2nd home loans) and the other key factors to consider as you make a vacation home purchase. The rules around taxes, insurance and mortgages for non-primary homes can be quite different from those for your primary residence — it’s important to understand what you’re taking on.

The first consideration: Will your new non-primary home be considered a second home or an investment property?

Lenders traditionally define a second or vacation home as one that is about 50 miles or more away from your primary residence. The owner must occupy the property for some part of the year, and the home must be suitable for year-round occupancy. However, the second home could be considered an “investment property” if your lender deems that the home is too close to your primary residence or one they feel will not really be used for vacation purposes.

Why does it matter?

Mortgage Implications

First, you might be required to make a bigger down payment on a second home. Additionally, mortgage rates for non-primary homes are typically higher than those for primary residences; the second mortgage carries more risk in the eyes of your lender. If you were to get into a financial bind, for example, your lender believes you’re more likely to pay on your primary home’s mortgage than your second home. Loans for investment properties can be even harder to find, with many borrowers turning to portfolio lenders, private lenders and credit unions to find funding.

Insurance Implications

Because property insurance rules and regulations vary from state to state, it is always best to work with a top real estate agent who specializes in your area who can give you in-depth insight into their local market. That said, there are a few general rules of thumb to keep in mind. If your home is characterized as an investment property, you’ll likely be required to buy a landlord’s insurance policy rather than a traditional homeowners policy. You might also need to purchase liability insurance. If you’re purchasing a true vacation home, you’ll also want to consider contents insurance. Contents insurance can be relatively affordable, but a landlord’s policy is typically higher than a homeowner’s policy.

Tax Implications

There are several states in the country — like Florida and Texas — that allow you to file a “homestead exemption” on your primary home, which means you are exempt from paying property tax on the full value of your home. This is not the case for vacation and investment properties. Even if your non-primary residence is valued less than your primary residence, you may end up with a higher tax bill for the non-primary home. This is one of the questions you should ask your Realtor, as you don’t want changes in your property taxes to catch you off guard.

Understanding non-primary home loans is just the first step in buying the vacation home you’ve been dreaming of. When you’re ready to take the next steps, connect with a trusted, top real estate agent who understands the unique demands of purchasing a perfect vacation home in your desired community.

Originally published at agentace.com on March 25, 2015.