Guide to buying a vacation home

Buying a vacation home may be a long-term goal for you. You’d have a place to stay whenever you take off for the beach or the mountains, for example. You’d own a piece of real estate that could go up in value. And you might secure the place where you plan to retire.

But for all the benefits of buying a vacation home, there are some things to weigh before taking the plunge. The main consideration: Can you afford to buy and maintain a vacation home, especially if you already own your primary residence? Plus, how often will you actually stay in your second home? Read on for more factors to consider.

You may already have one or several reasons that make purchasing a vacation home appealing. Here are some to consider:

1. You’ve got your own getaway. When you own a vacation home, you can stay there whenever you want to. That might be more desirable than booking a hotel room or a short-term rental, which can be challenging around popular holidays.
2. You may be able to generate revenue. When you’re not occupying the home, you might rent it out to create a new income stream.
3. You could use the vacation property for retirement. When you retire, you might decide to make your vacation home your primary residence.

Of course, any big financial decision comes with some considerations. Here are some factors to ponder before you buy a vacation home:

1. A vacation home can add to your expenses. Taking out a mortgage to pay for a vacation home means taking on another monthly bill. 
2. The interest rate on a mortgage for a vacation may be higher. The interest rates for vacation homes are typically higher than those for primary residences. That’s because borrowers may be more likely to default on payments for their vacation home than for their primary residence.
3. The costs of maintaining a vacation home can add up. Just like a primary residence, there are additional costs for a vacation home. In addition to the monthly mortgage payment, you would be responsible for things like property taxes, homeowners insurance, utility bills, appliance replacement, major repairs and normal upkeep. 
4. An interior update might be called for. Once you purchase a vacation home, you may realize that the interior needs to be freshened up, particularly if you plan to host renters. This could include buying new furniture, putting a new coat of paint on the walls and upgrading appliances.
5. The value may go down. Depending on where the vacation home is, the value could go down over time instead of up—leaving you in the red rather than in the black.

If you’re going to be using your second home infrequently, you may decide to earn some additional money by renting it out. The rental income could cover your mortgage payments and even pay for your travel expenses. You also might make a profit after accounting for all the expenses.

But unless you’re ready to manage a rental property on your own, you’ll typically need to hire a property manager. And that will come at a price. On top of property management fees, it’s a good idea to consider the wear and tear that renters can cause on the furniture, the appliances and the structure itself.

When you’re buying a vacation home, you’ll discover that you don’t have as many financing options as you do for buying a primary residence. For instance, you can’t take out a Federal Housing Administration or a Veterans Administration loan for a second home, because they’re intended for primary residences.

Plus, you’ll probably need to have a higher credit score in order to qualify for a vacation home mortgage rather than a traditional mortgage. And you’ll likely need to prove that you’ve got enough money set aside to cover loan payments for both your primary residence and vacation home.

Money for a down payment

For a vacation home mortgage, you might need to put down at least 10% for a down payment. It’s usually higher than a down payment for a primary residence, which can sometimes be as low as 3%. 

You may be able to take out a cash-out refinancing loan or a home equity line of credit on your primary residence to cover the down payment for a vacation home. But you might want to consider using your savings, if possible, so you don’t have additional debt. 

Is a vacation home tax deductible?

Generally, you can deduct expenses related to your vacation home when you file your federal tax return. You may be able to deduct expenses like mortgage interest, property taxes, maintenance costs, utility bills and insurance premiums. But there may be limitations if you use it as a rental property. The IRS has more information about this topic, and you might want to also discuss it with a financial adviser.

Owning a vacation home can bring great joy to you and your family. It might also bring a new source of income. But before you sign any loan paperwork, think about whether you can afford the monthly mortgage payments and ongoing household expenses. And if you’re looking at renting out your vacation home when you’re not there, weigh the costs of being a landlord or hiring a property manager.