two homes made of wood

Deciding whether to acquire a second home, whether for recreational purposes or as a means to generate rental income, entails a substantial financial commitment. With two mortgages to cover and two sets of property taxes to address, the expenses and advantages associated with homeownership will amplify. Here's a guide to help you determine if purchasing a second home aligns with your needs and preferences.

Often, those looking to purchase an additional home get confused between a second home and an investment property. However, the two are not interchangeable – especially when it comes to their financing.

Second Home, Defined
A second home is real property that the homeowner intends to occupy in addition to their primary residence for part of the year. Usually, second homes are used as vacation homes. Second homes may also be properties that the homeowner visits on a regular basis.

Examples of second homes may include:

  • A condo in a city where you frequently conduct business
  • A beach house that you and your family occupy during the summer months
  • A house in a different state where you have seasonal work

Before making the decision to buy a second home, there are several important factors to consider. Here are key points to keep in mind:

  1. Determine your purpose: Clarify whether you intend to use the second home for personal vacations, as an investment property, or as a rental property like an Airbnb. This will help you identify suitable locations and property types.

  2. Assess affordability: Calculate the total cost of owning a second home, including mortgage payments, homeowners insurance, utilities, and other associated expenses. Ensure that you can comfortably manage these financial obligations, especially if you plan to undertake significant renovations or remodeling.

  3. Consider the location: The location of your second home is crucial. The cost of a small home requiring extensive work in a high-cost area may outweigh that of a larger home needing minimal repairs in a low or medium-cost area. Align the desired location with your purpose for the second home.

Reasons for buying a second home vary, but common motivations include:

  • Purchasing for someone else: You may wish to assist a friend or family member who cannot secure a home loan due to credit or financial limitations.
  • Future planning: If your current residence is a starter home or you are working towards acquiring a forever home, buying a second home temporarily can serve as a stepping stone towards your long-term living arrangements.
  • Vacation property: Owning a second home provides a guaranteed accommodation option for your vacations, eliminating the need to rent hotels or Airbnbs. It can also serve as a future retirement residence.
  • Investment property: Some individuals choose to upgrade a second home, either for flipping, renting out, or listing on platforms like Airbnb.
  • Commuting convenience: If your primary residence is located far from your workplace, purchasing a second home can facilitate an easier daily commute. This option may involve a potential permanent move or part-time residency in the future.

Differentiating between a second home and real estate investing is essential, as they have varying requirements for down payments and credit scores. Clearly define the purpose of your purchase to ensure appropriate classification.

The decision to buy a second home should be made when:

  • You can afford it: Even if you require a mortgage, ensure that you can comfortably manage the monthly payments, including down payment, closing costs, utilities, and other expenses.
  • Your credit is solid: A higher credit score improves your chances of loan approval with lower interest rates, resulting in more favorable monthly payments.
  • You want to invest in the future: Whether it's for retirement, vacationing, or providing enjoyment for your loved ones, a second home can serve as a long-term investment.
  • When it comes to the down payment on a second home, the amount varies depending on the mortgage type. It can range from no money down to 3% or 5% for an FHA loan. Keep in mind that a larger down payment reduces monthly payment obligations.

It is possible to have multiple mortgages simultaneously, but only one property can be classified as your primary residence for tax purposes. Ensure you accurately indicate where you spend the majority of your time throughout the year.

If you already have an existing mortgage, it is still possible to buy another house as long as you can afford the payments and meet the approval criteria.

Using the equity in your current home to purchase another property is feasible. By taking out a home equity loan or line of credit, you can acquire a second home and make payments on both loans. This assumes you have sufficient equity in your primary residence unless it is owned outright.


Getting a Mortgage
If you can’t purchase a second home out-right, you’re going to go the traditional route and look into obtaining a mortgage. In order to qualify for a second-home loan, the property is usually required to be located in a resort or vacation area (like the beach or mountains), or be a certain distance from the borrower’s primary residence.

Understanding Interest Rates
Most lenders consider second homes to be more of a risk than primary residences, but not as big a risk as investment properties. Typically, interest rates will show this; second-home mortgages may have lower interest rates than investment property loans, but not necessarily. It can all depend on the borrower’s entire financial picture.

Understanding Rules
Second-home loans often include a second-home rider along with the mortgage. This rider states certain rules the borrower must abide by in order to qualify for the loan.

These rules often include the following:

  • The borrower will occupy and use the property as his/her second home
  • The property will be kept available for the borrower’s exclusive use and enjoyment at all times
  • The property cannot be used as a timeshare or be subject to any rental pool arrangement
  • The property cannot be subject to any agreements that require the borrower to rent the property or give a management firm (or anyone else) control over the use and/or occupancy of the property.

If you are looking for a second home or an investment home in Las Vegas contact me to get started.