Am I ready to buy a second home?

Beach house, lakeside cabin, desert get-away, urban landing pad … here’s what to consider when buying a second home

Key takeaways:

  • A second home gives you vacation and retirement options, investment potential, and more, but do your homework before you buy.
  • Ownership of a second home costs you more in upfront mortgage expenses; there are also ongoing expenses to consider for your budget.
  • If your goals align with your financial means, and you’re willing to take on the added responsibility of owning a second home, there are many potential benefits to be realized.


Dreaming of your chance to own a beach cottage or a cabin in the woods? Thinking about buying a place so you can visit your grandchildren more often? Or just wanting to invest in real estate?

There are a lot of good reasons to buy a second home. But before you jump in, ask yourself some hard questions to see if the timing is right for you.


How will you use your second home?

For starters, let's clear something up—in the mortgage industry, the term "second home" applies to properties that will be the borrowers second residence only. If you are looking to rent the property, it is technically called an "investment property." Make sure to be upfront with your lender about your intended use for the property as it will affect your mortgage and taxes.

That in mind, there are a lot of good reasons to buy a second property.


Vacation property

If you find yourself traveling to the same area every year, or you want a place where you can escape on weekends, a second home may save the cash you’d spend every year on hotels or vacation rentals while providing some equity upside.

Investment property

In the right circumstances, a rental property may provide you with a reliable income stream, either as a vacation rental or for tenants in a long-term lease.

Home upgrade

A second home gives you options if you’re renovating your primary residence and need to move out for an extended period. Or, if you discover you could rent out your first home for more than your current monthly mortgage payment, moving into a second home may make financial sense since it allows you to build equity in two properties.

Commuter home

If you’ve taken a job in a new location but you’re not sure it’s a good long-term career move, you may want to buy a second home and hang on to your original place.

Family home

Sometimes parents decide to purchase a home or condo for their college student instead of paying dorm fees. Or you could purchase a second home to keep aging parents nearby.


Can you afford a second home?

Avoid the mistake of jumping in to buy a second home without doing your homework. A second home means more than just a down payment, closing costs, and a second mortgage. Consider both the upfront and the ongoing costs of owning a second home.


Here are some of the differences you may find up front with the mortgage on a second home:

  • Higher interest rates. Second homes pose more risk to lenders so interest rates can be 1 to 2% higher than for a primary residence.
  • Larger down payment requirements. While some primary homes require a down payment of 10% or less, that’s rare for a second home; lenders typically require up to 20% or even more.
  • Higher required minimum credit score. A good target is 700 or higher.
  • Lower debt-to-income (DTI) ratio requirements. Many lenders want less than 43%.
  • Extra reserve funds needed. Depending on your intended usage (personal use or as a rental), a lender may require savings to cover up to six months of mortgage payments.


And know that if you plan to rent the property, your lender may have even stricter requirements.


You’ll also have extra ongoing costs of owning a second home:

  • Second mortgage payment. Even if you use your second home as a long-term rental, you must be prepared to make the mortgage payment when the home is between paying tenants.
  • Homeowners insurance. This can be high if your second home is in a hurricane, earthquake, or flood zone, or if the area is subject to wildfires.
  • Property taxes. These may be higher than your primary home. And be prepared for future increases if the value of your second home appreciates based on its desirable location.
  • Utilities. You may need to plan for high utility costs to accommodate air conditioning or heating needs.
  • Maintenance and repair costs. These can be even higher if you rent the property out or if the home is located at the beach, lakeside, in the mountains, or somewhere that requires extra maintenance.
  • Furnishings and landscaping. Remember to budget for cost of furniture and appliances, pool expenses, and even landscaping services.
  • Homeowners association (HOA) fees. Your mortgage does not cover HOA fees so be sure to account for these, which can total hundreds of dollars a month.
  • Property management fees. If you hire someone to help you rent the home either as a vacation or as a long-term property, fees can run as high as 10 to 12% of the monthly rent you charge.
  • Cleaning fees. Whether it’s a weekly cleaning for your vacation rental or a deep clean between longer-term tenants, cleaning expenses can add up quickly.
  • Security. You’ll likely want to invest in cameras, monitors, gates, or other features to keep your second home safe. An investment in security may help reduce the cost of your homeowners insurance.


If the extra expenses fit into your budget, and you have the time to manage the details of owning a second home, you may be ready for the next step.


Are you on track for retirement?

As you consider investing in a second home, make sure you’re on track for retirement. It’s best to meet with a financial professional, who can give you a comprehensive view of your situation. Your purchase of a second home is an investment, so it’s important to make sure it’s an investment that makes sense for you, now and in the future.


Is the second home lifestyle right for you?

While dreams of relaxing on your seaside deck or fishing all day from your mountain cabin may have you considering the purchase of a second home, you also need to consider the realities of ownership. And, if you’re thinking of purchasing a second home for your college student or aging parents, take time to consider financial aspects of the investment in terms of how long you’ll want to own the property.

Here are some things to consider:


Fixed vacation destination

How often will you use the second home? Do you love the location enough to commit your vacation time to this one place? If your second home is close enough to visit just on weekends, it’s one thing, but if you must fly to reach the property, make sure you have time to dedicate. If you are retired, or if your career allows you to work remotely, you will have even more flexibility to enjoy the second location.


Rental property management

If you decide to rent out the home, either for short-term vacation or for long-term rentals, you may need assistance from a property management company. Self-management is possible, but don’t underestimate the amount of time required to take care of all details such as finding qualified renters, handling maintenance issues, cleaning between tenants, and more. Make sure you can still pay all expenses even if the property sits empty. Damage from irresponsible renters can exceed any damage deposit you’ve collected, so plan for the financial and emotional headaches associated if this becomes the case.


Long-term commitment

Purchasing a second home is a great way to expand your real estate portfolio, but expenses like closing costs discourage quick resale if you decide the property isn’t working out for you. If you’re not completely sure, consider renting in the area for a while to see if you like living there.


Tax implications

If you and your family are the only ones who will use the second home, there’s usually no tax implication other than property taxes. But if you rent the property, either for long-term or short-term purposes, the home will be considered an investment property, which changes your income reporting requirements and allowable deductions. Consult a qualified tax advisor to learn how your purchase of a second home will affect you.


Final thoughts

If you’ve got money to spend—if you’re on track for retirement and your budget will cover the expenses—investment in a second home may make a lot of financial sense for you. If the second home is a property you’ll actively use as a vacation or retirement home, or if you’re confident that you can make money using it as a rental property, that’s another plus. And while gains are never guaranteed, real estate typically appreciates in value over time, making a second home a potentially effective way to diversify your assets.

Although there are tradeoffs between the responsibilities and the benefits, many people dream of owning a second home. If that’s you, do your homework and then enjoy your get-away!

Ready for the next step?

Bring your dreams within reach. A mortgage specialist at Global Credit Union Home Loans can help you find the right loan for your second home purchase. Find a home loan specialist near you.

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