Second homes used to be associated with the very well to do, the rich However, in today’s market it has become a norm, whether for a vacation or rental income.
According to Bankrate.com, more than nine million dwellings in this country are second or third homes. Many of us do not have a pile of cash lying around, but you may have something even better, equity.
When you are shopping for a second home, you have two friends: time and your primary home’s equity.
One common way to obtain a second home is to pull out equity that is built up in the primary residence. There are a couple of benefits to this. First, the interest paid on your primary mortgage is tax deductible. Talk to a tax expert to leam more about tax benefits on second and third homes. Secondly, you do not have to cash in a 401k or investment option to have a second home. The equity in the first home absorbs the loss of liquid assets.
Should you re-finance or take out a home equity line of credit?
This is a personal choice that needs to be based on your current situation and goals. Home-equity lines of credit tend to be a little easier to obtain but can float anywhere from 1-3 points higher than the prime rate. There may be a low introductory rate, but you still could end up repaying this piece at a much higher interest rate than if you would have taken a mortgage for the entire amount.
However, the cost involved in closing a home-equity loan may be less than a mortgage.
At the same time, unlike mortgage interest, which is deductible on up to $1 million of debt on your first and second homes combined, the home-equity cap is $100,000 (You get a tax break on 51.1 million total)
According to IRS rules and reg it states that you have 90 days from purchase to secure a mortgage against a principal or vacation residence; otherwise you can’t deduct any of it.
So you see it is very important to weigh both scenarios, talk to your lender and your tax adviser before making any decisions.
Do you have enough time to talk with the experts and make a decision?
The answer should be yes, remember, when buying a second home, time is your friend. Don’t rush into anything before weighing the pros and cons, put time between the impulse and action. Some people might refer to this as the “cooling off’ period. As with anything worth while, this is a very important stage. Wouldn’t you agree?
The actual loan process for a second home is painless. The work put in to it, will more than likely result in a wonderful rate of return, whether that be the many memories with friends and family or the security of income on an appreciating asset.
