Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."
Buying a second home has become a popular option for some Americans, and it’s easy to see why. Second homes can serve as a private getaway, a source of rental income, or a retreat for friends and family.
And, with increased opportunities to work remotely, you could even use a second home as a place to live whenever you need a change of scenery or more space.
Learn more about the benefits and drawbacks of a second home, and what goes into buying one:
- How to use your second home
- Pros and cons of getting a second home
- Qualifying for a second home
- Other ways of financing a second home
How to use your second home
There are certain financial implications depending on how you intend to use your second home.
As a vacation home
Owning a vacation home means you’ll always have a place to stay when you visit your favorite out-of-town spot.
You can make sure it has everything you need to be perfectly comfortable, and keeping an extra set of clothes and toiletries at your second home means minimal packing when you want to get away.
As for the financial implications, certain expenses associated with owning a vacation home might be tax deductible. Mortgage interest is deductible under the same rules as a primary residence as long as you don’t rent out the property.
You can typically deduct state and local property taxes too, subject to the usual rules capping this deduction at $10,000. These deductions will only save you money if you itemize.
As a rental property
If you want to buy a second home to use primarily as a rental property, lenders and the IRS will classify it as an investment property.
Owning a rental property can come with a number of perks. It acts as a passive income source and allows you to take tax deductions that can offset ownership costs.
These are a few of the rental expenses investment property owners are allowed to deduct:
- Mortgage interest
- Management fees
If you’re thinking of purchasing a second home, Credible can help you compare mortgage rates from multiple lenders — you can see prequalified rates from our partner lenders in just a few minutes.
Pros and cons of getting a second home
A second home can provide convenience, enjoyment, and income, but it’ll also come with additional expenses and responsibilities.
- You can use it as an investment. Whether you rent it out for a few days a year or as a full-time investment property, a second home can provide an additional source of passive income. If the property appreciates significantly, you can also sell it for a profit later on.
- You might get a tax break. If you’re paying mortgage interest and property taxes on both your primary residence and your vacation home, you’ll be more likely to benefit from itemizing deductions on your tax return. Investment properties also come with tax benefits akin to those for running any other business.
- It can simplify your vacation planning process. If you like to visit the same destination frequently, you might enjoy not having to book a place to stay every time you travel.
- You can retire there later on. If you know you want to retire somewhere else, buying a second home there now can give you a head start and make your transition easier later.
- No investment is a sure thing. Make sure your finances are strong enough to withstand long-term ownership of a second home, especially if the rental or resale markets weaken.
- You’ll have to shoulder additional costs. If you aren’t paying cash, a second home comes with borrowing costs. You’ll also incur expenses for maintenance and property taxes. Expect to pay higher insurance premiums than you would on a primary residence, too.
- You’ll have to deal with occupancy rules. Lenders, local laws, and homeowners associations may restrict how you can use your property, including how often you can rent it out and the length of each rental term.
- You’ll have less money for other things. You might get tired of vacationing at your second home, but have so much money tied up in it that you can’t afford to travel elsewhere. Maintaining a second home could also compromise your ability to meet other financial goals, such as saving for retirement.
Qualifying for a second home
Your interest rate will be 0.25% higher on a vacation home if you put down less than 15%. On an investment home, the rate will be 2.125% to 4.125% higher. The larger your down payment, the lower the rate premium.
Here are the lender requirements for second-home purchases as established by Fannie Mae and Freddie Mac:
|Vacation home||Investment home|
|Min. credit score||680||680|
|Max debt-to-income ratio||45%||45%|
|Min. down payment||10%||15%|
|Min. cash reserves||Two months||Six months|
|*Requirements above are for one-unit properties only.|
Credit score: 680
The minimum credit score to buy a second home is 40 points higher than the minimum needed to qualify for a conventional loan on a primary residence.
Debt-to-income ratio: 45%
The maximum debt-to-income ratio to buy a second home is 45%. With this DTI, you’ll likely need compensating factors such as more months of cash reserves, a larger down payment, or a higher credit score to purchase a second home.
Down payment: 10% to 15%
The minimum down payment on a vacation home is 10%. On an investment home, it’s 15%.
Reserve payments: 2 to 6 months’ worth
At a minimum, you’ll need enough money in the bank to cover a few months’ worth of principal and interest, hazard insurance, real estate taxes, and, if applicable, homeowners association dues.
On a vacation home, lenders require you to have two or 12 months’ worth of cash reserves depending on your down payment, credit score, and debt-to-income ratio. For an investment property, it’s six or 12 months’ worth.
Other ways of financing a second home
Getting a mortgage isn’t the only way to finance a second home. If you have enough equity in your first home, you could use it to purchase, or at least make a down payment on, your second home.
Tap into your home equity
Best if: You won’t get a lower interest rate by refinancing your primary residence.
Maybe you already refinanced your main home at rock-bottom rates and refinancing again would mean paying a lot in closing fees. A home equity loan or home equity line of credit (HELOC) could allow you to access up to 80% of your home equity without affecting the rate on your first mortgage.
One thing to remember: home equity loans and HELOCs usually have higher interest rates than first mortgages, but you can use the money however you want.
Use a cash-out refinance
Best if: You’d get a lower interest rate on your primary residence mortgage.
Cash-out refinancing can be a great way to take advantage of lower interest rates while pulling out some of your accumulated equity.
For example, if you owe $100,000 on your mortgage and your home is worth $500,000, you could use a cash-out refinance to take out $300,000 and buy another house.
Since you’d then be paying cash for your second home, you wouldn’t be subject to stricter underwriting, higher interest rates, or lender restrictions on how you could use the property.
Credible can help you easily find the latest rates for your next cash-out refinance. Compare multiple refinance rates from our partner lenders in just a few minutes — all without leaving our platform.