Is Your Primary Home Paid Off?
Once your primary residence is paid off, owning a vacation home may become more financially viable.
It’s possible, of course, that you might have the funds to qualify for two mortgages. If this is the case, ask yourself if you want the responsibility of paying both bills simultaneously. How will this impact the rest of your budget? Do you have sufficient cash reserves that you could withstand a job loss or other unexpected event without putting yourself at financial risk?
Do You Need Any Other Loans?
How will owning two properties affect your debt-to-income ratio? Lenders impose limits on the portion of your monthly income that goes towards paying debts (a measure known as the “back-end ratio”).
While this issue is most commonly discussed in reference to housing, it’s worth noting that many lenders, not just mortgage underwriters, will be looking at your debt-to-income ratio when they’re assessing your worthiness.
If you stretch yourself to the limits of your debt-to-income ratio, you could unintentionally damage your ability to qualify for other loans or credit. This might negatively impact your ability to buy a car or co-sign on private student loans for your children.
Bottom line: make sure you’re maintaining reasonable debt-to-income limits.
Do You Have Reliable Income?
Buying a vacation home is a huge investment. How reliable is your income?
Just like with any primary residence purchase, you don’t want to lock yourself into a mortgage if you think there’s a reasonable risk that your job security is shaky or unstable. If your industry is shrinking or your company seems like they might start downsizing, you may want to assess your income stability before purchasing a home.
Do You Have Any Large Looming Bills on the Horizon?
If you have big expenses looming on the horizon, such as paying for your child’s college tuition or funding your child’s wedding, make sure that there’s enough space in your budget to cover these bills as well as the cost of your vacation home.
Homeownership comes with many expenses beyond the mortgage. You’ll need to cover repairs, maintenance, and homeowner’s association dues if applicable. Make sure you have disposable income available in a savings account to cover the ancillary costs of homeownership.
How Much Do You Spend on Vacation Rentals?
How much money do you currently spend on vacation rentals annually – and how does that compare to the cost of maintaining a vacation home?
When you purchase a vacation home, your principal repayments plus any market appreciation will contribute to your equity. Meanwhile, your insurance, property tax, interest, repairs and maintenance will be costs.
So the basic question to ask yourself is: which option lets you come out ahead? Is it better to continue renting every year, or is it better to purchase a home, paying the various costs associated with its ownership and maintenance?
The answer to this question will depend on the specifics of your situation, so talk to a real estate agent.
Do You Want the Responsibilities of Homeownership in Two Locations?
One home is a lot of work; two homes require double that. Are you willing to take on the task of caring for two homes? If you decide to turn your vacation home into a rental, you’ll need to either bare the responsibilities of management or have the financial resources to hire people to help you.
If you do want to turn the property into a rental home, you’ll need to find a local property manager to represent your home. Ask your real estate agent for recommendations for good local vacation-rental managers.
Do You Know the Area Where You Want to Buy?
You’re probably purchasing a vacation home in an area you’ve never lived in before. Make sure that you have a solid understanding of the specifics of that location.
Ideally, you’ll have visited the area several times and know which neighborhoods you would prefer to purchase a home in.
Hire a real estate agent who is an expert in that area. Ask your agent about how factors like weather, holidays, and daily traffic affect the neighborhood. Your agent will be able to provide a pricing history for the area and show you how much comparable properties have recently sold for.
Buying a vacation home is a huge step, both personally and financially, so make sure you work through the details carefully. But once you make a smart investment, you’ll be able to create unforgettable memories for years to come.
If you know where you would want to buy a vacation home, head on over to coldwellbanker.com to find the home of your dreams.