Two houses for someone who says I have a mortgage and want to buy another house

Home Buying

Have a Mortgage & Want to Buy a Second Home? Read This Guide

December 18, 2018 | by Reuven Shechter

At A Glance

If you have a lot of disposable income, a second home can be an excellent investment opportunity. Here, we’ll tell you everything you need to know about buying a second home, from looking at listings to picking up the keys.

Two houses for someone who says I have a mortgage and want to buy another house

Updated July 30th, 2019

According to the NAHB, there were approximately 7.4 million second homes in the United States in 2016. Owning a vacation or weekend home is a dream of many Americans, particularly in states like Florida, where 15% of all second homes are located.

If you already have a mortgage and want to buy a second home, get in touch with one of our top-rated real estate agents to learn how they can help you save thousands on your purchase.

In this guide, we’ll walk you through the ins and outs of buying a second home: what counts as a second home, the upsides and downsides, and how to acquire a mortgage and make a purchase.

What is considered a second home?

A second home is defined as a residence that a homeowner plans to live in for a portion of the year besides the house they currently live in. Usually, a second home needs to be either a certain distance away from the homeowner’s primary residence, located in a resort/vacation area, or situated in a city they frequently travel to for business.

While there is occasionally some overlap between investment properties and secondary homes, the main difference between the two is that an investment property is used primarily for financial benefit, not for personal use.

Is buying a second home worth it?

Buying a second home can be worth it if you have sufficient disposable income. If you have money to spend, and you want to put it into real estate, buying another home can be a great idea and an excellent investment.

However, it’s important to make absolutely sure that you can afford it. Some financial advisors believe that a homeowner should only buy a second property if they can pay for it in cash. In their view, taking out a loan for a second home should be completely out of the question. While not everyone would agree with this advice, it does highlight the dangers of buying a second home: you can end up struggling to pay off two properties that you can’t afford.

When evaluating whether to buy a second home, consider these questions:

  • How often do you plan to use it? If you only plan to spend one or two weeks there each year, there are likely more affordable options available.
  • Are you financially ready? Make sure your finances are in order and speak with a financial advisor if possible. Don’t let yourself end up with huge amounts of debt that you can’t pay off.
  • Can you make a commitment? Just like any real estate purchase, buying a second home is a huge commitment. Be honest with yourself and make sure your house in the mountains isn’t just a fleeting fantasy.

What are the benefits of owning a second home?

The benefits of owning a second home can be broken down into three points:

Personal Enjoyment

If you dream of having a personal getaway, the pleasure you derive from your second property can be priceless. Instead of having to deal with hotels or rentals, you’ll have your own home away from home that you can retreat to whenever you want.

Investment Returns

Real estate is generally a good investment, and second homes are no exception. Assuming you purchase your second home in a market that’s expected to grow, you can benefit from some sizable profits when it comes time to sell. You can also rent your home while you’re away to make some extra income.

Tax Breaks

Just like with your first home, you can deduct the interest from your mortgage, the interest from a HELOC or HEL used for home repairs, and your property taxes. In addition, if you rent out your home for 14 days or fewer, the rental income is tax free.

What are the drawbacks of owning a second home?

There are four primary drawbacks to owning a second home:

Purchasing and Furnishing Costs

When you rent a vacation home for a short period, you’re likely thinking in terms of thousands of dollars, but when you buy a home, you’ll need to think in hundreds of thousands. Besides purchasing the property itself, you’ll need to furnish your new vacation home, which usually isn’t something you need to do for a vacation rental.

Maintenance Costs

All houses need maintenance. Just because your second home won’t be your primary residence doesn’t mean the required repairs will be much different. You still must budget and save money for regular and emergency repairs.

Mortgage Payments

Lenders charge higher interest rates on second home mortgages and often require a higher down payment (between 20-30%). Although some financial advisors recommend against taking out a mortgage for a second home, this may still be a viable route for some.

Commitment

Buying any kind of house is a big commitment. If you decide you’ve made the wrong decision after purchasing a property, you can end up dealing with the consequences for years to come. With a vacation rental, you always have the option of going somewhere else if your tastes change, and you decide you’re more of a mountain man than a beach bum. However, if you buy a second home, you’re stuck with your destination choice until you sell, which can be a long and arduous process.

Is it hard to get approved for a second mortgage?

Getting approved for your second mortgage is usually harder than getting approved for your first. While making mortgage payments on a single home is hard enough as it is, throwing a second mortgage into the mix makes things exponentially harder, and lenders are acutely aware of this risk. Because of this, they are more selective, and it’s much more difficult to acquire a second mortgage with a less than optimal credit score or financial history.

How do I qualify for a second home mortgage?

Qualifying for your second mortgage is overall the same as qualifying for your first. The main difference is that you’ll be under more scrutiny from your lender. You will need to provide:

  1. Proof of income: Your lender will want to see you have sufficient income to cover two mortgages. They’ll favor applicants with a low debt-to-income (DTI) ratio, preferably below 41.
  2. Credit score: Lenders will use your credit score to make an approval decision. Generally, you’ll need a credit score of at least 620-680 to qualify.
  3. Bank and other asset statements: Lenders want to see you have cash and other liquid assets on-hand. Without sufficient assets, you’re unlikely to qualify for a second mortgage.

What is the required down payment on a second home?

The down payment for a second home is larger than for a primary residence. While the down payment for a first home is usually between 10-20% (or as low as 3.5% sometimes), you must put 20-30% down for your second home.

How to Buy a Second Home and Rent the First

Buying a new home and renting out the first is a straightforward process. Here’s what you must do:

  1. Work with a real estate agent to find a second home
  2. Buy with cash or get approved for a mortgage
  3. Make sure there are no owner-occupier restrictions on your first mortgage
  4. Check that your homeowners association allows rentals
  5. Investigate your first home’s local laws
  6. Let your insurance company know you’ll be renting out your home
  7. Market your first home until you find a renter
  8. Let the renter move in

Overall, as long as you check with your lender, local government, homeowners association and insurance company about any restrictions, renting out your first home is simple.

Why would anyone object to you using your property as a rental? FHA loans, for example, specifically restrict homeowners from renting out their properties in order to prevent FHA-insured loans from being used for investment properties. Homeowners associations may also be hesitant to allow you to rent out your property because renters have a smaller investment in the home and could end up lowering the home’s value through improper care.

Learn more: How to Buy a Second Home and Rent the First Out

Is buying a second home a good investment?

Overall, real estate is viewed as a good investment across the board. According to Zillow, the US housing market in 2019 is still hot and is expected to grow 2.2% over the next year.

However, Zillow also predicts a housing recession in 2020, which can be either good or bad news depending on your current investment status. If you’ve already invested in a new property, the lower prices a recession may bring could make you lose money. However, if you haven’t invested yet, lower prices mean you can get a better deal soon.

Regardless of rising or sinking home values, owning a second home means you have rental opportunities, which can provide a reliable source of income if you make the effort to find renters and keep the property in good condition.

Next Steps: Connect with a Top Buyer’s Agent to Learn More

Owning a second home can be a rewarding experience on both a financial and a personal level: it can serve both as a source of great pleasure and wealth.

If you want to buy a second home, you need to work with an experienced real estate agent to ensure you get the best deal. Real estate transactions are complicated, and you shouldn’t navigate these murky waters on your own.

Clever partners with top-rated full-service agents from major brands like Century 21, Keller Williams, and RE/MAX who have agreed to offer their services at a discounted price to Clever referrals. That means you get access to on-demand viewings, negotiation help, and expert guidance for a fraction of the typically associated cost. 

Clever Partner Agents will advise you on how to secure your second mortgage and what types of properties will make a good investment for your second home. What’s more: our Partner Agents offer $1,000 Home Buyer Rebates to clients in 40 states, making buying a second home that much easier.

Want to learn more about how Clever can help you save thousands? Fill out this form, and we’ll reach out to you to schedule a free, no-obligation consultation with one of our experienced Partner Agents.

Top FAQs About Buying a Second Home

Can I afford to buy a second home?

Some financial advisors believe that you can’t afford a second home unless you can purchase it in cash. Others, however, take a more moderate approach and accept mortgages as viable alternatives to cash purchases. If you qualify for a second mortgage, you can be reasonably sure that you can afford the property, but speak with a financial advisor before going ahead with the purchase.

To get a better idea of how a second home fits into your finances, draft up a budget that includes all the hidden expenses of a home like repairs and see how the expenses gel with your financial situation.

Are property taxes higher on a second home?

Property taxes depend on how a home is used, not whether it’s your first or second home. There are three tax brackets your home can fall into:

  1. Equal personal and rental usage
  2. Primarily rental usage
  3. Primarily personal usage

Tax rates do not change based on your property’s bracket. However, deductions do change. If your home falls into bracket 1 or 3, you can deduct mortgage interest and property taxes. If your property is in bracket 2, you can’t write off interest or property taxes, but you can write off rental losses.

What credit score do I need to buy a second home?

A credit score of 620 is typically the bare minimum to qualify for a second mortgage. However, most lenders will want to see credit scores above 725 because second mortgages are more risky for them. If you plan to buy with cash, your credit score is irrelevant.

Is buying a vacation home a good investment?

Real estate is generally considered a good investment across the board and vacation homes are no exception. If you buy in an area with a good long-term outlook, you may be able to profit when it comes time to sell. In addition, you can rent out your second home when you’re not using it as a passive income source.

Is my second home an investment property?

As long as you are not primarily using it for commercial purposes, your second home is not an investment property. If it’s mainly for personal use or you’re renting it out and using it for yourself an equal amount of time throughout the year, it is not classified as an investment property. However, if you rent it out more than you use it, it’s considered an investment property.

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