For a long time your vision has been to buy a second home – a vacation home that may even serve as a nice place to retire in the future – the very far future. For now, you’ll enjoy it with the family, invite friends, possibly even build your legacy. Here are three things you need to know before making this investment.
1. Higher cost of entry
While you are probably already aware that the cost of your second home at the beach or in the mountains may be significantly greater than the cost of a comparable home in your neighborhood, you may be surprised to find that other costs related to purchasing that dream home will be larger also.
Interest rates for second homes are generally a bit higher than for primary residences – expect to pay a quarter to a half a percent more for these loans. This does not seem like a lot, but, it is another expense to work into the budget for your dream home. You’ll also find that a second home brings additional expenses, including taxes, maintenance, utilities, and possibly some additional dollars for care-taking while you’re not there. Plan for 5 – 10% of the purchase price for these costs.
Additionally, with a second home, your lender will require a show of good faith on your with a request for a larger down payment – generally 20% or more ranging up to as much as 32%, depending on the lender. This is not necessarily a bad thing as it will help to keep your mortgage payments lower, but, it’s worth knowing that you’ll have to put a significant amount of liquid assets towards your home. Along with the larger down payment will be the requirement for a higher credit score, 725 to 750 is the general range, as well as a lower debt-to-income ratio than is required for the home you consider your primary residence.
2. Think about the shorter mortgage
This is the time to enjoy your weekends, vacations, and your family, so, determine just how long of a mortgage you’d like to sign-up for and if you want to carry a mortgage into your retirement years. While there are some reasons to spread out the payments over a longer time period, your retirement dollars must be part of the equation. Quite often you can get a lower rate on a 15 year mortgage, so it’s worth the additional research.
3. Insurance
If you’re contemplating renting out your new home at all, or even offering it to a fund raising group for their silent auction, you need to know that you are protected at all times. Talk to your insurance agent about obtaining and maintaining the proper insurance to protect your family, your home and all of the wealth you have worked so hard to build. Your financial security is paramount and you should discuss both homeowners and umbrella insurance with your agent.
Your journey to home ownership may be something you have looked forward to for a long time and it is wonderful to hit this milestone in your life. You have reached an important goal that you have set for yourself, and it may only be the beginning. Enjoy your new home knowing that you have properly prepared for your continued financial success by building it into your lifetime financial plan.