- If you're considering buying a second home, there are four signs you can afford it.
- Those signs include being on track with your retirement savings and saving for other important goals.
- Another sign that you can afford a second home is that you don't need to rent out the home in order to afford it.
- You'll also need to be able to afford the maintenance and any emergency expenses on both of your homes.
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Buying a second home is a major purchase. While it's a nice idea to own a place for a weekend getaway or a month-long stay, knowing if you're ready to buy can be complicated.
Financial planner Andrew Rosen has worked with a number of professionals, executives, and retirees over his nearly 20-year financial planning career. "A second home is something that comes with a lot of costs and a lot of blood, sweat, and tears," he says.
But if renting a vacation home isn't the move for you, there are a few signs that you can afford to take the plunge and spring for a second home of your own.
You're on track for retirement and other financial goals
Before considering anything else, you have to be on track for your other financial goals, especially retirement.
"If you know that you're on track financially for retirement through your current financial plan and savings rate, and there's enough discretion there that you can afford a second home, then I'd just look at it like another expense to plan for," says Rosen.
Before your home purchase, it might be a good idea to check in with a financial planner. They can help you figure out whether you're saving enough for retirement, and determine if you need to save more in advance of this big commitment.
You can afford the upkeep and maintenance
One thing about homeownership is that things go wrong, and it's your responsibility to fix them.
"We see what goes wrong with our normal homes, but [imagine] this at a home that you're not there for 300 days a year," Rosen says. When you're away from the property often, something is bound to go wrong, and it could be even worse than it would be in your first home since you're not there to catch the problem in its early stages.
Given that, you'll have to save cash to keep up with the maintenance. It's not uncommon for financial planners to advise saving 1% to 4% of a home's value in a high-yield savings account to keep up with ongoing maintenance costs and any surprises.
You don't need to rent it out to keep up with payments
While many people find it logical to rent out a property that they're not living at through a homesharing site, it's not something you should count on.
"Make sure that you can afford it without any other income stream for it," Rosen says.
There's nothing wrong with choosing to rent out a second property, but making your payments shouldn't rely on rental income, since rental income isn't guaranteed. Choose a second home that you can afford without any rental income to make sure that you won't fall behind.
You can meet the tighter mortgage standards for a second home
Getting a mortgage for a second home isn't like getting a mortgage on a first home. "They'll look at you more strictly for sure on a second home," says Rosen.
That might mean that you need to have a higher credit score or a larger down payment to qualify. Mortgages for properties tht aren't a primary residence often aren't eligible for loans that have low down payment options, like FHA loans.
Prepare to pay a higher interest rate on a second property, too. According to online mortgage lender and real estate information news site The Mortgage Reports, loans for second homes and investment properties typically have an interest rate 0.5% to 0.75% higher than the typical primary residence mortgage.
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