Can You Afford to Buy – And Own – a Second Home?
A detailed look at the costs of second-home purchase and ownership.
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Have you been dreaming of a getaway home in your favorite rural, beach, or mountain destination? Or pondering whether real estate isn’t one of the better places to invest your money? The next question to ask is whether a second home is, realistically, within your financial reach.
You’ll want to consider not only the purchase price, but the various incidental costs that come with buying and keeping a second home, as outlined below.
Initial Costs to Buy a Second Home
Your second home’s purchase price will certainly constitute the lion’s share of your costs. And you may need to make a higher down payment than you would on a first home (assuming you won’t be paying all cash.) The lender might be extra cautious if you’ll be carrying two loans at once.
Start by looking at list prices in the region where you’re hoping to buy – but remember that list prices are just an opening for negotiation. Depending on the local market, the selling price could be far different – and in a hot market with multiple bidders, much higher – than what you see advertised. See “Home List Price: What Is a House Worth?” for details.
The purchase price is not, as you probably remember from buying your first home, the end of the analysis. At the settlement or closing, you’ll also feel the sting of numerous incidental costs, such as any points you’ll pay upfront on your loan, a home appraisal fee, the cost of your lender running a credit report on you, notary fees, initial premiums for hazard, title, and flood insurance, and so on.
Some of these will depend on the sale price, others on local custom. Pull out the HUD-1 Settlement Statement (prepared in connection with your mortgage) that you received with your first home purchase – it will help you get an idea of what these closing costs will be.
Ongoing Costs of Owning a Second Home
No matter how much time you spend at your second home, it’s going to cost money to maintain. The most significant ongoing financial demands are likely to include:
- basic utilities
- repairs, maintenance, and improvements
- property taxes, and
- rising mortgage interest rates (if you have an adjustable rate mortgage).
How Much You Will Pay in Utility Costs
Whether or not you’re living in your home year-round, you may need to pay for electricity, water, sewer, and other such bills. The reasons are obvious if you’ll have renters, but keeping everything hooked up can be equally important if the home will stand empty. For example, if you’ve got a sump pump running to make sure the basement doesn’t flood, it won’t do its job if the electricity is turned off.
Do some research about common expenses in the geographical area where you might buy in order to get a sense of likely expenses.
How Much You Will Pay for Repairs, Maintenance, and Improvements
All houses are subject to wear and tear. How fast a house goes downhill depends on how well it was built, where it’s located (for example, houses by the ocean usually get beat up more than inland houses), and how diligent the previous owners were about basic maintenance. Don’t assume that your current house’s repair costs are a good indicator of the next one’s.
If you’re planning to rent the property out, you’ll also need to budget for careless tenants who may bang up walls, stain carpets, crack windows, or otherwise accelerate your house’s need for fixing up.
The generally accepted rule of thumb is to set aside 1% of the purchase price of your home each year. That means, for example, that if you paid $300,000 for your second home, you should tuck $3,000 a year into a special bank account meant for home repairs or related emergencies. (Saving a little each month tends to be easiest.) Add extra if your home is more than ten years old.
Your calculations will be different if you're buying a property governed by a homeowner's association, as described in, "What maintenance and repairs do I need to pay attention to for my new condo investment?".
Then comes the matter of home improvements, whether because you hate the kitchen tile or you’ll never find a renter willing to rent a three-bedroom home with only one bathroom. The sky is the limit on how much these can cost! See the “Home Improvements” section of Nolo’s website for more advice, such as on choosing projects that will raise your home’s resale price.
How Much You Will Pay in Property Taxes
Property taxes are probably the most expensive recurring cost that you will have to deal with in your second home — and when they go up, it can be in the thousands of dollars. Property tax rates, assessments, and collections occur at the local government level (your city or township).
Property taxes are most often due on a quarterly or biannual basis. The amount you pay is usually based on a percentage of your home’s assessed value at the time of purchase. From that point forward, the degree and pace at which your taxes increase will depend on where your property is located — that is, in which state, and within which local jurisdiction. For example, in California, property taxes increase at a snail’s pace, while in Massachusetts, the sky seems to be the limit. But at least they’re deductible from your federal taxes!
How Much Your Mortgage Rate May Change
When choosing a mortgage for your second home, consider how your loan choice will affect the predictability of your future home costs. A fixed-rate mortgage is obviously the most predictable, because your interest rate will remain the same over the life of the loan.
However, you may not get the same mortgage rates as you see advertised, particularly if you plan to use your home as an investment property. The lender may, knowing that second home mortgages are the first to go unpaid when the owner hits a financial rough patch, and the likely damage that renters will do to its “collateral,” offer a mortgage on less beneficial terms.
The interest rate on an adjustable rate mortgage (ARM) adjusts up or down based on a specific index (a published number), and tends to start out lower than fixed-rate amounts. However, it can rise to uncomfortable levels, and many homeowners misunderstand the upper limits. See the “Getting a Mortgage” section of Nolo’s website for details.