8 Min Read | Published: August 5, 2024
How to Buy a Second Home
Explore the ins and outs of purchasing a second home. See how to get a second home mortgage and other important considerations.
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
At-A-Glance
A second home can be a viable investment, but you’ll want to consider whether it’s the right move for you.
When considering affordability, you’ll want to factor in costs including the mortgage payment, down payment, insurance, utilities, maintenance, repairs, and taxes.
Once you decide you’d like to go ahead and invest in a second home, you’ll want to get preapproved. Consider working with a reputable real estate agent as well.
Whether you’re looking for a vacation property that you visit during the summer or a home away from home where you can spend the weekends, investing in a second home could be a good way to diversify your investment portfolio and allow you to tap into a growing housing market.
However, before you take the plunge, you’ll want to consider whether buying a second home is the right move for you. In this article, we’ll look at some important things you should consider if you’re thinking about a second home.
Can You Afford a Second Home?
While a second home can be a good investment, it’ll also require an outlay of capital. If you’re considering the possibility of a second home, then there’s a good chance that you may be able to afford it. But to play it safe, you’ll want to consider the following costs and expenses that are typically involved when buying a second home.
- Mortgage Payments
The most obvious expense of a second home is your mortgage. Every month, you’ll be required to make a payment that covers at least the principal and interest, as well as taxes and sometimes mortgage insurance.1
- Down Payment
If you take out a mortgage, you’ll likely be required to make a down payment. How much your down payment should be will vary, but in most cases, this will need to be 10% or more.2
- Homeowners Insurance
Home insurance is important as it can protect your second home and personal property. Keep in mind that you may have to pay a higher premium than you would for a primary residence and you may receive less coverage.3
- Utilities
It’s important to budget for utilities, such as electricity, water, and gas. Note that in some cases, you’ll need to use your utilities even if you’re away in order to ensure security or prevent pipes from freezing, for example.4
- Maintenance
Just like your primary residence, your second home will require routine maintenance and repairs, and maybe even home improvements as well. Before you purchase it, make sure you’re aware of any repairs it may need right off the bat and in the long term so you can plan for them accordingly.
- Taxes
Property taxes are another important consideration. If your second home is located in a different state than your primary home, then your taxes could be different as well. Also, don’t forget that property taxes aren’t set in stone and may increase over time.
Second Home vs. Investment Properties
Second homes and investment properties are not the same thing. Lenders may have stricter requirements for investment properties than for second homes. How your property is classified may impact you from a tax perspective as well.
Generally speaking, how the home will be classified comes down to which category it falls into:5
- A second home: An additional residence that you purchase for enjoyment and to visit during part of the year.
- An investment property: A property that you’re planning to rent out.
If you live in your second home for 14 days or fewer per year (or less than 10% of the days it is rented) then it would be considered a rental property. Income earned would be taxable.6
On the other hand, if you’re using the property for more than 14 days per year (or more than 10% of the days it is rented) then your rental income isn’t taxable. However, you won’t be able to deduct expenses.7
Down Payment Requirements for a Second Home
You may be able to purchase a primary residence with as little as 3% or in some cases, even 0% down. However, if you decide to invest in a second home, most lenders will require a down payment of at least 10%. Also, if you put down less than 20%, you may be required to pay for mortgage insurance. This helps to protect the lender if you stop making payments on your loan, but can cause your monthly payment to go up.8
How to Buy a Second Home
If you’re in the market for a second home, here are some steps you’ll want to take:
- Choose Your Location Carefully
First, figure out where you’d like your home to be. Maybe you’re looking for a property close to your loved ones. Or perhaps you’d prefer something a bit further away and near a beach, mountains, or a city you enjoy. You’ll also want to consider the local housing market in the area that you’re planning to buy and do research on the health of the economy. Are there new jobs coming into the area? Is the population increasing or decreasing? Are there good schools nearby? These factors (and more) can help you gauge the health of a local area and may impact your home’s long-term value.
- Consider Appreciation
Before you purchase a second home, even one that you’re not planning to rent out, you’ll still want to make sure that it checks out as a viable investment. Carefully consider the price that you’re buying it at, and pay attention to the housing market that you’re buying in. Do research on historical housing prices over the last ten to twenty years in the area. Are they increasing? Or have they stayed stagnant or even gone down? This can give you an idea about what type of appreciation (if any) you may be able to expect on your home.
- Look Into Financing Options
Next, do your research and determine which types of mortgages you may qualify for. In most cases, second homes are financed with conventional loans or jumbo loans. You’ll typically need a minimum down payment of 10% for a conventional loan and 20% for a jumbo loan.9
- Get Preapproved for a Mortgage
By getting preapproved for a mortgage, you can position yourself as a serious buyer. A preapproval will show sellers that a lender is willing to finance you, up to a certain amount.
- Consider Hiring a Real Estate Agent
An experienced real estate agent can simplify the process of buying a second home. You can count on them to help you find the ideal property, negotiate on your behalf, and provide you with valuable advice every step of the way.
- Go House Hunting
Once you have a real estate agent lined up, it’s time to begin your search for a second home. It’s a good idea to make a list of the features you’re looking for so that you can narrow down your options and save time during the house hunt.
- Make an Offer
After you’ve found the ideal second home, your real estate agent can help you zero in on the right offer price. Then, they’ll make the offer for you. Keep in mind that the seller has the right to accept your offer, reject it, or counter it.
Frequently Asked Questions
A mortgage is not required for a second home, with some people opting to pay for their second home in cash. However, opting for a mortgage could make purchasing a second home a more affordable option.
You won’t be able to take out a Federal Housing Administration (FHA) loan to buy a second home. FHA loans are only intended for primary residences.10
The Takeaway
Also known as a vacation home, a second home may be a viable investment, depending on the price point that you buy at and the housing market that you buy in. However, before you commit to one, it’s vital to consider all of the costs involved and understand how the buying process works.
1 “Mortgage Payment Breakdown: What’s Included In Your Payments,” Quicken Loans
2,3,4,10 “5 Things To Know About Buying A Second Home,” Forbes
5,6,7 “Second home vs. investment property: Different mortgage requirements and rules,”Bankrate
8 “How To Buy A Second Home With No Or Low Down Payment,” Rocket Mortgage
9 “Buying A Second Home: A How-To Guide,” Rocket Mortgage
Anna Baluch is a personal finance writer from Cleveland, OH. She enjoys helping people from all walks of life make smart financial decisions. Her work can be seen on Credit Karma, Forbes, LendingTree, Insurify, and many other publications. Connect with Anna on LinkedIn.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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