What You Need to Know About Owning a Second Home

If you could choose any place to have a second or vacation home, where would it be?

Someplace warm and tropical? Maybe in an area closer to family? Or perhaps a fortress of solitude in a location far, far away.

While you ponder the where – in this article we’ll explain the what, who, why, when, and how of second homeownership.

Let’s start with a definition.

What is a second home?

According to the IRS, a second home is a property that an owner visits for part of the tax year (at least 14 days). The property is typically located far away (usually 50 miles or more) from the owner’s primary residence.

Who typically buys a second home and why?

Vacationers

“I would say it depends on the person and the area of the country that you’re in,” said Gus Vargo, a Home Lending Officer in Cape Coral.

“Down here in Florida, a second home typically means a condo or a home that ‘snowbirds’ get when they want to spend the winter by the beach or in the sunshine,” Vargo said. “In our Wisconsin and Michigan markets, a second home could be a cabin or a lake home they go to every weekend to hunt or fish.”

Traveling Professionals

Many people purchase second homes for work-related reasons.

“Let’s say you’re 100 miles away from your job and you’re going to be there three or four days a week,” Vargo said. “Maybe it makes sense to own it rather than throw money away in hotels or rental fees.”

Landlords

While various rules apply to investment properties, many Americans own second homes to generate income (e.g., rental properties).

When is a second home considered an investment property?

“A second home must be called an investment property if you’re not spending at least two weeks of your year at the home and are renting it out to individuals – or if you assign the rights over to a property management company,” Vargo said.

To further clarify:

“If you retain the rights to decide the (rental) calendar, who's going to be there and when, then you can call it a second home as long as you spend at least two weeks there,” Vargo said. “You can rent it out the rest of the year.”

There are other important distinctions between owning a true second home and an investment property, according to Vargo:

1. With an investment property, the home can be near the borrower’s primary residence.
2. Generally, interest and insurance rates are higher when purchasing a second home as an investment property, due to the increased risk involved.

3. For an investment property, you must make a higher down payment due to the inability to purchase PMI (Private Mortgage Insurance). In comparison, a standard second home may have a lower down payment requirement.
   
   

How can you make second homeownership a reality?

The process is essentially the same as getting a mortgage for a primary residence, starting with getting pre-approved, according to Vargo.

“As long as you meet the ‘three Cs’ (credit, capacity and collateral), we’ll get you approved,” Vargo said.

However, the credit standards are typically higher for purchasing a second home, but the process is the same.

Lastly, here are four critical pieces of advice for potential second home buyers to consider:

1. You may be eligible for a second home with a low down payment, but your PMI will be high. "If you don't have more than the minimum down payment, my counsel would be not to buy a second home,” said Vargo.

2. Be aware of the insurance costs associated with your location. Vargo added that premiums went “through the roof” in some Florida residential areas due to a recent hurricane.
3. Work with an experienced lender who’s executed many second-home mortgages and knows the guidelines. “You want someone who can give you all the information so you can make the right decision,” Vargo said. “I always tell them (prospective second home buyers), I’m going to treat your transaction like it was mine. I always try to put myself in their shoes and do what’s best for them.”
4. Finally, “make sure it’s something that you’re going to use and enjoy, or it’s not a good investment,” Vargo said.

“The process of buying a second home is not as daunting as you might think,” Vargo said. “We just want people to come in with the right expectations to ensure they have a great experience.

“Customer service is incredibly important to me and to our bank.”