Throughout the pandemic, many people’s yearning to travel had them purchasing second homes to have an alternative set of surroundings. Whether related to the pandemic or just because it’s your favorite travel destination, perhaps you’re also thinking about owning your own slice of Maine’s shoreline, building a cape on Martha’s vineyard, or buying a Florida condo.
But before you put down roots, ensure that this decision aligns with your holistic financial plan.
Today, we’ll talk about a handful of smart considerations before you purchase a second home.
1. Understand Your Complete Financial Picture
When you have a second home, your expenses may very well double—two mortgages (more on that later), property taxes, insurance, ongoing maintenance, upgrades, etc.
In addition, there can be unique costs associated with a vacation home. For example, there may be additional insurance costs if your second home is in a flood zone or hurricane path. Or HOA/COA dues if you’re eyeing a property with included amenities and services.
While you can afford it, think about what those extra costs may do to your other financial goals. Below are a few questions to start with:
- Would buying a second home cut into your travel budget?
- Would you need to put off your kitchen remodel or another home upgrade to accommodate your ideal cash flow?
- Would you have to sell off any assets to free up funds for the down payment?
One final thought is to consider your desire to manage the property and upkeep when not using it. You may want to hire a house or property manager to take care of things (cleaning, landscaping, maintenance, etc.). All of this comes with additional costs and tradeoffs you should think through.
2. Don’t Buy Right Away; Rent First
Buying a new home or property is a big deal. The last thing you want to do is make a quick decision or feel pressure to buy right away.
For example, you may know you want a condo in Naples or a house in the Nantucket. However, how well do you really know the area you’re considering?
- Have you looked into the specific neighborhoods?
- Do you have a feel for access to neighboring areas and recreation options?
- What entertainment or stores do you want to be close to (or far away from)?
Knowing the answers to these questions is critical to feeling confident and secure about the area you buy into.
A great way to feel things out is to rent first. If possible, take some time to rent in different places and neighborhoods. Doing so will allow you to test out several areas before you buy, which can help you avoid buyer’s remorse.
Even if you can afford to buy right away, you want to make your purchase as intentional as possible. By renting first, you can provide the most value to yourself and your family. Ultimately, your decision will be much more informed, leading to a more positive outcome in the long run.
3. Know How Buying A Vacation Home Will Impact Your Larger Travel Goals
As you know, travel during COVID has been extremely limited, which led many people to purchase vacation homes. Doing so created more opportunities to go on vacation, find a change of scenery, and have a space to unwind.
Now that restrictions are lifting, and you can travel again, will you want to keep traveling to the same destination summer after summer? Or will you want to try somewhere new?
Buying a vacation home often means that you’ll be spending most of your vacations in one place. If that idea is exciting for you, then great!
However, if you want more location flexibility and a bigger cash cushion to support extended travel, perhaps it isn’t the right time to buy a second home.
4. Leverage Debt Strategically
When you purchase a second home, you want to do so in a financially savvy way. Here are some options to consider:
Buy The Property In Cash
All-cash purchases may not make the most sense in a low-interest-rate environment, but they could create some flexibility for your future. Keep in mind that interest rates are climbing.
If you have the cash on hand to buy a property in full, it will alleviate some of the extra costs associated with a mortgage, leading to less stress and more peace of mind.
In addition, if you find yourself in a competitive real estate market, making an all-cash offer will undoubtedly put you at the top of the list for any sellers out there.
Securing a conventional mortgage for your second property may be a great option in a low-interest-rate environment. Keep in mind that your interest rate will likely be higher than your primary residence, and you will have access to different types of loans:
- 30-year fixed
- 15-year fixed
- Adjustment Rate Mortgage (ARM)
Depending on your goals for the property and the interest rate environment you find yourself in, one of these options may lend itself to being more aligned with your long-term goals.
Engaging in a cash-out refinance could make sense if you already have a primary residence with a mortgage and built-up equity.
With a cash-out refinance, you can replace your current mortgage with a new, larger loan, where the difference (new loan minus old loan) is paid to you in cash. Therefore, you can turn around and use the money for the down payment on your new property.
This is an excellent option if you don’t want to liquidate other assets or have any liquid funds available. But, going down this road would not make sense if your primary residence mortgage is at a lower mortgage interest rate than if you were to refinance today.
HELOC (Home Equity Line of Credit)
Another option to consider if you have equity in your primary residence is a Home Equity Line of Credit (or HELOC).
A HELOC is a revolving credit line (similar to a credit card) that you can establish, where the collateral is the borrower’s equity in their house.
While a useful strategy, many HELOCs don’t have sky-high spending limits, meaning it might not be best for a primary source of funding. It’s often best to use HELOCs as supplementary funds to your already earmarked home-buying savings.
5. Ensure Your Second Home Will Improve Your Lifestyle In The Long-Term
You must also think about the lifestyle you aim to live today and in the future. Ask yourself,
- Is this “the spot”?
- Do you see yourself potentially retiring in this location?
- How do you want to make memories with your family?
- Is this second home part of your larger estate and legacy plan?
By taking a step back and reflecting on these perspectives, you will ultimately make the best decision that aligns with your plans.
Our focus is to help clients see their complete picture and guide them in taking steps that optimize their long-term goals.