Buying a vacation home or an investment property is different than buying a primary residence. Buyers who already have a primary residence may be surprised by some of the ways that mortgages, taxes and interest rates vary between these two types of properties.
Down Payment Differences
It's possible to get an FHA loan for a primary residence with as little as 3.5 percent down. Vacation homes are not the same. For a vacation home, the buyer must put down at least 15 percent down payment in order to secure a mortgage. Some lenders may require buyers to put down more.
Higher Interest Rates
Vacation homes are considered to be high risk when compared to primary residences, because home buyers are more likely to walk away from a second home payment. To account for this risk, mortgages for vacation homes typically have a higher interest rate.
Landlord Insurance Rates
If your vacation home is rented out on a regular basis, you may need to pay landlord insurance rather than homeowner's insurance. Landlord insurance rates are typically higher than homeowner insurance rates. Talk to your insurance broker or insurance representative to find out how much you can expect to pay to insure your second home.
Tax implications for second homes are very different from tax implications for primary residences. Rental income is taxable, if you rent the property out for 15 or more days per year. If the home is financed, you can claim an income tax deduction for mortgage interest payments as well as property taxes. If the home is a rental property that isn't used as a residence throughout the summer, in Smith Creek or elsewhere, you can claim tax deductions for maintenance and depreciation.
Home Search Differences
Searching for a vacation home is far different than searching for a primary residence. Buyers looking for a primary residence often consider factors like access to schools, neighborhood parks and hospitals. Buyers looking for a vacation home have an entirely different set of a priorities.
- Views. Pleasant views make spending time in your vacation home more relaxingand make it more enticing to renters as well.
- Room for lots of people to sleep. Whether you plan to rent your vacation home out to groups or you plan to use the home only for yourself, you'll want a home that provides room for large groups to sleep.
- Outdoor living space. People on vacation often enjoy sunning themselves, grilling, playing games and napping in their back yard.
- Safety. Assuming your vacation home will be empty for days or weeks at a time, you'll want to know that your property and belongings will be safe in your absence.
- Access to conveniences like restaurants, stores and recreational activities. Unless your vacation home is in an isolated, remote location, access to restaurants, stores and recreational activities may be very important when you're on vacation.
Sometimes finding a vacation home that meets all the right criteria can take time, especially if you're living far from the location where you'll be buying your second property. Working with a capable real estate agent can help. Your real estate agent can help you pick the best neighborhoods and can provide guidance while you look for a home from a far away location. If you're hoping to buy a vacation property, these tips can help.