How to Make a Second Home More Affordable

Posted by Tamara Berryman on Wednesday, May 28th, 2014 at 11:53am.

puchasing-a-second-homeThe dream of owning a second home is one many people have and strive to achieve for several years. It not only takes patience, but time and effort, along with a little more than a simple strategy to buy another home other than your primary residence. There will be not only the cost of purchasing a property, but the maintenance costs associated with a house. Be it a single family dwelling, a condo, a townhome, or even a villa, it will come with some additional costs.

First and foremost, you should really start thinking seriously about locality. As the saying in real estate goes, three factors determine the price of a home: location, location, and location. It’s inescapable and very true, and will certainly be evident when searching for another property. A single family home, with three bedrooms and two baths can be quite affordable in one place and priced exceptionally high in another.

What this means is being on the beach is not the same as being near the beach. A waterfront property will cost considerably more than one that’s five or ten minutes away from the water. Not only will the purchase price be higher, there will be more expenses such as flood insurance and maintenance will come at a higher price because of the salted air and sand.

Pros and Cons of Owning a Second Home

Of course, owning a second home isn’t all fun and games, but it does have it’s advantages. Those benefits are things like having a dedicated place to stay when in town, which is a nice perk over having to make reservations. Being able to customize it is another advantage, having updated appliances instead of adapting to a stay at a resort or rental.

“For many American families, the American dream doesn't stop with the first home. But saving enough to turn the key to a vacation home is challenging: buyers need a large down payment and have to pass even more lending hurdles than when they bought their primary residence. With some planning, budgeting and perspective, a second home is attainable.” --Market Watch

Yet another benefit is a place to offer to family and friends when they want to get away. They’ll be able to cut down significantly on the cost of traveling out of town and will have all the comforts of home. It’s also a potential source of passive income, but that’s actually one of the cons.

Though you’ll be able to rent it out seasonally or for a few days here and there, if you go past the limit set by the IRS, it will be taxable income. Another downside is having to keep the property in good repair, which is something you’re likely doing now in your primary residence. Keeping it secure will require either hiring a property management service or installing a security system.

Making a Second Home More Affordable

You’ll notice that cost is woven into practically everything when purchasing and maintaining a second home. However, there are ways to make owning another property a bit more affordable over the long run, which is an ideal goal. Here’s how to cut down the cost of a second home:

  • Start saving for a big down payment. The ideal amount is paying all cash for a second home, but if that’s not realistic, then, you should shoot for at least 20 percent to avoid paying private mortgage insurance. If possible, 30 to 40 percent will be a significant benefit, reducing your monthly mortgage payment to a more affordable level.

  • Pay down your debt month after month. Lenders favor homeowners that have a small debt-to-income ratio or DTI. You ought to have one of less than 35 percent and it should be measurable against your net monthly income, not gross. You’ll do yourself a huge favor by having a small debt-to-income ratio and take a lot of pressure off.

  • Know how much home you really can afford. Your DTI is just one indicator, because you’ll have not only another mortgage to carry, but extra expenses such as maintenance, insurance, and security. You have to factor in these as well as any other expenses to arrive at the amount you can realistically afford.

  • Establish an emergency fund. It’s not if something breaks, it’s when. At some point, there will be the need to pay for a repair, and you ought to plan for the worst while hoping for the best. The more you have set aside, the better because it will come-in handy.

  • Get the right insurance. Speaking of needing repairs, this is where insurance might be a real life saver. Speak with your insurance agent about the right products so you’re prepared to handle the inevitable.

  • Purchase at a discounted price. Short sales, bank-owned properties, and foreclosures are a shrinking part of active properties, but they are still out there and bargains are still to be had.

Tamara Berryman
Google

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