With high prices and low inventory challenging housing markets across the country, you might think it’s not a good time to buy a second home. But low interest rates give buyers more buying power than they might think, and I see a great deal of enthusiasm from second-home buyers despite some of the headwinds.
If you have the desire and means to buy a second home, there are a few factors to keep in mind as you begin your search. I’ll walk you through some of the most common topics I discuss with my clients.
Have a clear purpose for the property
If you’re buying a home to use as an income property, you’ll usually have to come up with a higher down payment and show that you have more substantial reserves. In addition, some lenders require proof of your ability to make at least six months of payments; however, if you plan to rent out your second home occasionally but without formal operation by a property management company, these types of requirements may not come into play.
Know the tax implications of buying a second home
Tax law can change from year to year, but currently, interest paid on loans of $750,000 or less can be deducted from your taxes, so keep that in mind when you begin your property search.
Consider the hidden costs of buying a second home
Even if you can afford the mortgage payment, taking on the costs of a second home means you’ll be paying for water, power, cable and internet service, as well as insurance, maintenance and upkeep. I see significant interest in condos as second homes, but if that’s your preferred product, keep in mind you’ll likely be paying a monthly homeowners association fee on top of your mortgage.
Take advantage of the lower interest rates
The sticker price of residential properties might seem high right now, but if you bought a second home at a lower price but higher interest rate, your monthly payment, amortized over 30 years, could be substantially higher. Today’s low interest rates aren’t going to last forever, and they make houses more affordable over the long term.
Know that buying land and building from scratch may bring uncertainties
The COVID-19 pandemic has created major supply chain problems across a wide variety of industries, including construction. In addition to logistical delays, the price of lumber and other building materials has skyrocketed, making it difficult for home builders to set cost estimates. They don’t know how long it will take them to get all the materials they’ll need, and they don’t know how much supplies will cost six months from now. So, make sure your budget has some flex in it to account for this uncertainty.
Consider whether drawing from a home equity line of credit could help
If you qualify, you might be able to draw from a line of credit; however, in some situations, it might make sense to pay cash for the property if your line of credit is big enough. Talk with a home loan specialist to discuss your options.
~ David Ballard is a Birmingham-based Valley Bank residential lending consultant.