second home mortgage

Demand for vacation homes is up. This is why.

Bethany Ramos Home Buying, Homeowners, Vacation Homes

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Reading Time: 6 minutes

Millions of us have transitioned to working from home during the pandemic. As a result, the demand for vacation homes has climbed.

As Gay Cororaton, Senior Economist and Director of Housing and Commercial Research for the National Association of REALTORS® (NAR), explains:

“Working from home is a positive factor in demand for vacation homes.”

And so, homebuyers are taking advantage of the newfound flexibility to work from anywhere. This location may be outside a primary residence — in the mountains, at the beach, or beside some other beautiful backdrop.

Own a vacation house? 2 strong signs it’s time to sell

The NAR also notes:

“Sales in vacation-home counties increased 48 percent on average year over year in the third quarter; overall, 81 percent of vacation-home counties saw a year-over-year sales increase.”

If you’re a vacation homeowner who’s been thinking about selling, you may see the most success by listing now, at a time when demand for second homes is high.

Here are two of the biggest reasons:

1. Right now, vacation homes sell fast.

Listings for secondary residences aren’t staying on the market long.

The NAR goes on to say that:

“In September, 68 percent of vacation homes sold in less than a month. Historically, about 30 percent sell that quickly… It’s a pretty amazing uptick compared to past years.”

2. Home prices continue to rise.

When an item is in demand — as homes are today — prices automatically increase.

As the NAR notes:

“In the third quarter, prices in vacation-home counties rose by about 32 percent year over year. Seventy-nine percent of these counties experienced year-over-year price gains. NAR defines a vacation-home county as one in which seasonal housing accounts for at least 20 percent of stock.”

Maybe your vacation home is sitting empty, or perhaps it’s not drawing as many renters as usual. Or, you might just want to sell your second home so you can trade up or stop worrying about the care of another residence. There’s currently an influx of demand, so you’re likely to see a better return on your second property investment.

If you plan to trade up or even buy a vacation home for the first time, know that record-low mortgage rates, triggered by the pandemic, also make it an ideal time to buy. Low rates are what’s allowing many more homeowners to afford a second mortgage. Before you buy, it can help to fine-tune your search by asking several questions.

9 questions to ask yourself before you invest in a vacation home

A vacation home can be a unique getaway and a solid investment, depending on what you do with it. There are plenty of options: Rent it out, enjoy it yourself, or transform it into a year-round venue for hosting events.

To help decide between a cabin on the shore or a walk-up in the city, answer a few questions:

1. Is it convenient?

A vacation home allows you to escape the stresses of ordinary life. But sometimes, being away from modern conveniences can be a stressor too.

If you buy organic, is it going to be an issue if the only grocery store in town sells packaged foods? If you’re 50 miles away from the nearest ER, will you be putting your family at risk?

Make sure your desired vacation spot is both comfortable and convenient. If you’ve done your research and plan on renting, you can let renters know that the convenience factor (including walkability) is an added selling point.

Find a loan for your second home that you feel good about. Click here to get connected.

2. What’s off-season like?

Ask your realtor what people have to say about their experience in the area. During the off-season, walk around town, dine at some restaurants, and chat with the locals about how they like living there. Consider living in the area for a couple of weeks off-season, if you can.

If you plan to use the home yourself when you don’t have renters, remember that you’ll probably be using it off-season. If you plan to have renters year-round, you need to make sure your vacation home has perennial appeal.

3. Are you making your own decision to invest?

Or is someone making it for you? If a relative, friend, or business associate wants you to buy their vacation home, ask plenty of questions. This is a smart way to approach a suggestion from someone you know. You’re not saying no — you’re surveying your options.

The more questions you ask, the more you’ll be able to tell what their intentions are. If they’re good, and the home seems great, look into it. But if they sound like they just want to make money or offload a property, buyer beware.

4. How are you going to keep it safe?

One of the biggest advantages of renting out your vacation home is that you can deter break-ins. But if you’re only renting your home for part of the year, you’ll have to find a way of checking in on your home when it’s empty.

Consider hiring a house-sitter or a responsible college kid in the area to keep tabs on your house while you’re away. You could also install a security system that allows you to check in on and monitor your home from your phone or PC. And, look into the local crime rate before you buy.

5. How easy is it to get there?

That island getaway sounds great until you realize you have to fly your whole family there once a year, and it’s going to cost you. Even a cute cabin in Vermont isn’t looking so cute when you realize that it’s nine hours away, and you’re exhausted by the time you get there.

If you have renters, are you going to be comfortable renting out a home in a remote location, where you can’t check in on how it’s doing? A good compromise is a vacation home that’s a few hours from where you live.

6. How much work will you have to do?

One thing that no one likes to think about when they’re buying a vacation home is how much maintenance they’ll have to take on. But it’s worth thinking about. If you’ve been away from your home for months, expect dust and cobwebs.

Besides the cleaning, you may have to fix pipes, heating and cooling, and more. Of course, you can avoid having to do unexpected home repairs by getting a thorough appraisal before you buy your house. Don’t forget to research natural disaster insurance for the area.

7. Can you really afford it?

When you’re looking for the perfect vacation home, it can be hard to stay realistic. Many people buy more home than they can afford because they’ve fallen in love with the look and feel of their new place. But because you’re going to be using this property a lot less than your primary house, it’s important to be reasonable.

The good news: Because of historically low rates, your buying power may increase — meaning, you could afford a larger or better-located vacation home without increasing your housing budget. Home equity is also rising, so you’re likely to see a quicker return on your investment.

But there are added expenses to account for: If you have renters, you may have to pay someone (or several people) to maintain your house while you’re away. When you’re buying a vacation home, spend slightly less than your monthly budget and allot the extra cash for home security, unforeseen repairs, and maintenance.

8. What’s the actual cost of a second mortgage?

A mortgage on a second home may have a higher interest rate — typically less than half a percentage point above our currently low market rate. A second mortgage could also require a down payment of 10 percent or more. That’s because borrowers are more likely to default on a second home than on the home they live in. So, how do you know if you can afford it?

Prequalify with a reliable lender. Find one who’s willing to dig deep into your financial picture. Your loan officer will take a look at your monthly debt, and if it’s less than 36 percent of your pre-tax monthly income, that’s a good sign. It helps if you have healthy credit. If you’re looking for extra funds, ask your lender about your options: This may include pulling equity from your primary house.

9. What are the taxes on a second home?

Second homes get taxed differently than first homes. If you rent out your home for fewer than 15 days a year, your home could qualify as “personal-use property.” You’ll only have to pay for your mortgage interest and property taxes. But if you do rent, you’ll have to send receipts of your rental income to the IRS.

Thankfully, you can deduct repairs, utilities, insurance, and management costs on your rental property. You’ll have to make sure that you only deduct the time periods when your renters are in, not when you used the home for your own vacation.

Here’s the main difference: When you sell your second home, the sale will be considered a capital gain. But you can avoid the capital gains tax. Just use your vacation home as a primary home for at least two years before you sell it.

Do this whether you plan to sell or buy

Reach out to someone who can be trusted. With more than 30 years of experience, we’re here to make buying and selling a first, second, or third home easy and fast. Contact a local loan officer to find out if you’re in a good position to sell and/or to learn how much vacation house you can afford to purchase.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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